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The Bulls Need to Make a Stand This Week

By Jeff Clark
Tuesday, March 31, 2015

The market needs to bounce this week...
 
Last week, the S&P 500 fell 48 points. If it's going to rally through the end of April – as I've argued should happen – then it needs to quickly recover a good chunk of what it lost.
 
Otherwise, things could get real ugly, real fast...
 
Take a look at this weekly chart of the S&P 500...
 
 
This chart shows a long-term rising-wedge pattern going back almost four years. In this pattern, an index makes consistently higher highs and higher lows but the distance between each new high and low is smaller. Eventually, the index has to break out of the pattern one way or another.
 
There has also been "negative divergence" on the Moving Average Convergence Divergence (MACD) momentum indicator – the S&P 500 making higher highs while the MACD has been making lower lows – for nearly two years. This is often an early warning sign of an impending reversal. 
 
So the conditions are ripe for a potentially strong move lower for the stock market.
 
But as I argued a couple weeks ago, this old bull market may still have one more rally left in it before it finally rolls over. April tends to be a strong month for the stock market. The S&P 500 has gained 1.36% on average in April over the past 65 years.
 
Recent performance has been even better – the S&P 500 has gained an average of 2.78% in April over the past 10 years. So the bulls have reasons to be optimistic.
 
But the bulls need to make a stand this week.
 
As I said earlier, last week's action pushed the S&P 500 down 48 points. It's now precariously close to the support line of the wedge. Another move lower this week will likely break the pattern to the downside – which could kick off the long awaited correction everyone seems to be waiting for.
 
To prevent that from happening, and to strengthen the case for one more rally to new all-time highs, stocks need to rally this week. At a minimum, the S&P 500 needs to recover about half of what it lost last week. So we're looking for the S&P 500 to close the week back above the 2,085 level. That will give the weekly chart enough breathing room to avoid breaking down.
 
We got a solid push higher yesterday. What matters, though, is how the market closes at the end of the week.
 
Personally, I'm betting on a rally. The seasonal strength in April is just too strong to ignore. But there are no guarantees in the stock market. So while I expect stocks to rally, I'll be quick to hit the "sell" button if they don't.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

"We're in the midst of one of the longest bull markets in history," Brian Hunt and Ben Morris write. "And opinions are flying. Are we set to enjoy another year or two of big gains? Or are stocks about to crash in 2008 fashion?" Brian and Ben say if you're using smart asset allocation, position sizing, and trailing stop losses, you'll be just fine no matter what happens. Get all the details here.
 
The MACD isn't the only indicator Jeff uses to gauge where a market is headed next... He also uses Bollinger Bands, bullish percent indexes, and the "empty restaurant" indicator.

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From The Crux
Market Watch
Symbol Price
Change
52-Wk
S&P 500 2088.22 +1.3% +12.4%
Oil (USO) 17.25 +0.6% -52.9%
Gold (GLD) 113.81 -1.1% -8.6%
Silver (SLV) 15.98 -1.5% -16.2%
U.S. Dollar 98.00 +0.6% +22.2%
Euro 1.08 -0.8% -21.5%
Volatility (^VIX) 14.14 -6.2% -1.9%
Gold Stocks (^HUI) 162.90 -2.0% -27.5%
10-Year Yield 1.96 +0.5% -27.7%

World ETFs
Symbol Price
Change
52-Wk
India (IFN) 28.16 +1.2% +31.8%
China (FXI) 44.79 +3.9% +28.5%
Japan (EWJ) 12.79 +0.5% +14.3%
USA (SPY) 208.40 +1.3% +14.6%
Taiwan (EWT) 15.79 +0.9% +12.5%
Singapore (EWS) 12.87 -0.1% +2.2%
S. Africa (EZA) 67.00 +0.9% +3.2%
Israel (ISL) 17.55 +0.6% +0.7%
S. Korea (EWY) 57.61 +0.5% -4.6%
Canada (EWC) 27.23 +0.6% -5.2%
Lat.America (ILF) 29.26 +1.5% -17.5%
Russia (TRF) 9.83 +0.5% -19.9%

Sector ETFs
Symbol Price
Change
52-Wk
Semis (PSI) 27.21 +1.3% +36.4%
Biotech (PBE) 56.17 +0.9% +39.6%
Health Care (IYH) 156.47 +0.9% +30.5%
Retail (PMR) 41.57 +1.4% +27.7%
Big Tech (QQQ) 106.62 +1.0% +23.9%
Real Estate (IYR) 79.84 +1.1% +23.0%
Consumer Svcs (IYC) 145.07 +1.1% +22.7%
Transportation (IYT) 157.64 +1.1% +19.3%
Software (PSJ) 42.04 +1.0% +19.3%
Defense (PPA) 37.08 +1.6% +17.1%
Financials (IYF) 89.72 +1.5% +12.7%
Utilities (XLU) 44.48 +1.4% +12.2%
Insurance (IAK) 49.74 +1.5% +11.3%
Industrials (IYJ) 108.81 +1.6% +10.8%
Media (PBS) 26.89 +1.0% +9.9%
Telecom (IYZ) 30.53 +0.4% +4.9%
Construction (PKB) 23.62 +1.4% +4.3%
Basic Mat (IYM) 82.80 +1.7% +2.3%
Water (PHO) 25.06 +1.2% -3.8%
Alt. Energy (PBW) 5.61 +0.4% -17.8%