Building a Base

The markets finished the week up over 2% on the three major indices and we now have had our second up week in a row. Back to back positive weeks haven’t happened for the S&P since the second week of April. The markets appear to be building a base that could set the next run up. Base building after all the volatility we have experienced lately is needed and constructive.

The bear case is the market is running on fumes. We have a short term extreme overbought condition which could mean that at least a short term pullback is in order to alleviate that situation. All the recent economic reports have been poor at best, but the market has mostly ignored them. There is tremendous overhead resistance that will come in play soon from the 50 day moving average and the highs back in January at the 1140 -1150 level for the S&P 500. Resistance for the NASDAQ is in the 2325 -2350 range for the same reasons.

A technical indicator known as a Head and Shoulders pattern may be forming on the charts for the major indices. If resistance comes into play and the markets fail at the overhead resistance levels outlined above, and the 1040 level for the S&P doesn’t hold, expect a quick decline down to the 875 – 950 level. Since so many chartists are aware of this potential pattern, its likely outcome is probably unlikely, but time will tell.

The calendar does not favor the bulls either. Next week is the week following the quarterly quadruple-witching options expiration week, and most often it tends to be negative. However, it has an even stronger negative bias for the month of June. Using the Dow Jones Industrial Average as the benchmark, the week after June’s expirations has been down for 11 straight years, and 18 of the last 20 years. We shall see if that streak continues.

The markets resiliency has been amazing, but that is why I remain long equities. The markets 200 day moving averages were pierced to the upside this week and are now acting as near term support for the indexes. Gold, silver, and gold mining stocks all had great weeks. High yield ETF’s may be signaling further strength for the stock market. Both HYG and JNK have battled through their converging 50 and 200 day moving averages. If they can hold above these levels – expect the stock market rally to continue. Next week may add some clarity to the equation.

*Pacific Financial Planners maintains positions in the following: DIA, DT, EFA, GAZ, GDX, GLD, HYG, IEV, JNK, MDY, NHP, QQQQ, SGG, SLV