The Path With Least Resistance Is Up

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 16, 2010.

Yesterday we said that: “although the overall technical backdrop is still positive, the fact that short-term momentum indicator is rolling over as the S&P 500 index facing strong resistance does not call for an immediate break to the upside.  So traders shouldn’t be surprised if the market takes a short-term breather.”  As anticipated, disappointing September Empire Manufacturing Index, which slipped to 4.1 from 7.1, sent stocks lower Wednesday morning.  The markets however, managed to put together a strong rebound as the S&P 500 index came in contact with support near the 1110 level.  For the day, the Dow Jones industrial average gained 46 points, or 0.4%, to end at 10,573. The NASDAQ added 12 points, or 0.5%, to close at 2,301290.  The S&P 500 gained 4 points, or 0.4%, to end at 1,125.

Notably retailers added on to recent strong gains with the Retail HOLDRs (RTH) up 0.2% to 94.39.  Shares of Avon Products Inc (AVP) outperformed, jumped 2.2% to 31.28.  This is bullish from a technical perspective.  In fact, as the chart below indicated, the stock could climb above 36 and test the one-year high after breaking out from the so-called bullish flag pattern.  Just so that you know, initially profiled in our September 3, 2010 “Swing Trader BulletinAVP had gained nearly 5% and remained well position.

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The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for AVP and S&P 500 index.  As shown, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).

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Chart 1.1 – Avon Products Inc (daily).

Looking at the one-year daily chart of AVP we can see that the stock put in a bullish series of higher highs and higher lows pattern after reached an interim low in May 2010.  Wednesday’s breakout above resistance at the September 9th high suggested strongly that the one-week bull flag, which represented the digestion period of the late August rally, had resolved itself into a new up-leg.  So it seems to us that this rally could carry AVP up to the next level of resistance near 35-36.  A sustain advance above August high of 31.68 will confirm this.  Immediate support is at 29.78, or the white line in the chart.  At this juncture, only a close below that level will begin to compromise the near-term bullish outlook.

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Chart 1.2 – S&P 500 index (daily).

The S&P continues basing sideway just below resistance at the 1130 region as the market digests the overbought situation.  The action is very encouraging.  Additionally, Money Flow measure is currently indicating a bullish signal as it’s held firmly above the zero line.  This is bullish and if we continue to see that, then it will reinforce our bullish view that the S&P will get back to the April high of 1220 after this correction.  Immediate support is at 1110, or Monday’s upside gap.   A close below that level signals short-term correction with target of 1087, or the trend-line moving average (as represents by the white line in the chart).  Resistance is at 1130.  That level represents a major price resistance.  A sustain advance above it will complete the bullish inverse head-and-shoulder pattern and trigger a major buy signal with target of 1220, or the April high.

In summary, the fact that the market refuses to go down in the face of the overbought situation suggests strongly that the path with least resistance is up.  This increases the probability for a sustain breakout above major resistance at the 1130 level in the S&P 500 index.

(By:Michelle Mai for Capital Essence)

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Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.

Stocks Ready For A Short-term Breather

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 15, 2010.

After a strong run that saw the major indices closed higher for eight out of nine straight sessions, stocks took a breather Tuesday.  The Dow Jones industrial average fell 18 points, or 0.2%, to end at 10,526. The NASDAQ added 4 points, or 0.2%, to close at 2,290.  The S&P 500 fell 1 point, or 0.1%, to end at 1,121.

Positive surprise Advance Retail Sales for August together with Best Buy (BBY) better-than-expected earnings had helped sending Retail HOLDRs (RTH) higher by 1 percent.
Speaking of retailers, shares of Carmax Inc (KMX) outperformed, up 1.9% on strong volume to 23.54. This is bullish from a technical perspective.  In fact, as the chart below indicated, the stock could climb above 25 and test the 52-week high.  Just so that you know, initially profiled in our August 2, 2010 “Swing Trader BulletinKMX had gained nearly 12% and remained well position.

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The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for KMX and S&P 500 index.  As shown, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).

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Chart 1.1 – Carmax Inc (daily).

As shown, KMX is heading for a test of key price level near 26.50, or the 52-week high set in April 2010, following last week’s bullish breaking out from the 3-month trading range.  Money Flow measure is currently indicating a bullish signal as it crossed above the zero line today.  This is bullish and should continue to provide foundation for further advance.  Buyers however, should be aware that the stock is now overbought after recent advance.  So we’d wait for at least a short-term consolidation before putting more money to work.  Immediate support can be found around the 22 area.  That level roughly corresponds with the prior range top resistance.  Pullback that respects this support will enhance the already bullish technical backdrop.

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Chart 1.2 – S&P 500 index (daily).

With Money Flow measure above the zero line, the near-term technical bias has turned up.  But the S&P 500 index met major daily chart resistance at the 1130 region. That level roughly corresponds with the neckline resistance of the 5-month inverse head-and-shoulders pattern.  Additionally, short-term momentum indicator has shifted lower from below the overbought level.  This increases the probability for a short-term consolidation.  So it should not be surprising to see prices correcting modestly lower from current level.   Immediate support is at 1111, or Monday’s bullish upside gap. Pullback that respects this support is bullish.  And a decline below it, meanwhile, signals short-term correction with target of 1087, or the trend-line moving average (as represents by the white line in the chart).  Resistance is at 1130.  That level represents a major price resistance.  A sustain advance above it will trigger a major buy signal with target of 1220, or the April high.

In summary, although the overall technical backdrop is still positive, the fact that short-term momentum indicator is rolling over as the S&P 500 index facing strong resistance does not call for an immediate break to the upside.  So traders shouldn’t be surprised if the market takes a short-term breather.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.

Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.