Despite Problems, Bullish Trends In Place

by: Chris Ciovacco

The markets face numerous problems, including still-elevated bond yields in Spain and Italy, slowing global growth, and the media's latest obsession…the dreaded "fiscal cliff". Yet, despite all that, stocks and commodities are flashing bullish signals. Analysis after the close on Thursday pointed to a possible rally in risk assets. The market delivered on Friday with a 22 point gain in the S&P 500.

The quantitative easing watch part III shifts back into the spotlight on Tuesday and Wednesday as Ben Bernanke is scheduled to update Congress on the status of monetary policy. From Reuters:

Bernanke will present his semi-annual monetary policy report to Congress against a background of lackluster growth at home and a festering sovereign debt crisis in Europe that is increasingly preoccupying U.S. policymakers. A voting member of the Federal Reserve's policy-setting body, Dennis Lockhart, said on Friday he has edged closer to supporting another round of QE if the sluggish economy can't improve. However another regional bank president reiterated that he did not see any need for additional Fed easing.

The recent strength in stocks and commodities can be attributed to, at least in part, the market's expectations for QE3. The Vanguard Total Stock Market ETF (NYSEARCA:VTI) has established a bullish upward-sloping trend channel (see below). If the market remains within the channel, VTI could push toward 71.50 in the coming weeks. A similar move in the S&P 500 would bring a possible visit to 1,396.

When Ireland bailed out its banks, it put taxpayers on the hook for the equivalent of around 40% of its annual gross domestic product. In that context, it is easy to understand why the European Central Bank has adopted a new stance. From the Wall Street Journal:

The European Central Bank, in a sharp turnaround, advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks-though finance ministers have for now rejected the approach, according to people familiar with discussions.

The video below covers bullish slants in both traditional charts and DeMark exhaustion counts. Trends, possible targets, support, and resistance are the primary topics. You can find DeMark-related comments on the S&P 500 ETF (NYSEARCA:SPY) beginning at the 00:51 mark. Other ETFs and their mark in the video: foreign stocks (NYSEARCA:EFA) 2:58 DeMark, Treasuries (NYSEARCA:TLT) 3:47 DeMark, euro (NYSEARCA:FXE) 5:51 DeMark, global stocks (NYSEARCA:VEU) 7:09, European financials 10:09, NYSE Composite 10:31, RSP 11:27, S&P 500 trends 12:07, VIX (NYSEARCA:VXX) 13:22, commodities (NYSEARCA:DBC) 14:38, gold (NYSEARCA:GLD) 16:15, silver (NYSEARCA:SLV) 16:40, SPY Fibonacci 16:58, and the Dow (NYSEARCA:DIA) at the 17:46 mark of the video. DeMark charts and indicators are proprietary tools from Market Studies, LLC.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Here is a link to the video. Video: Stock Trends Intact

Monday's weak retail sales numbers will give the QE3 advocates some additional ammunition. Like employment, retail sales have been weak for three straight months. The recent bullish move off the lows in commodities shows a market that is expecting the Fed to begin dropping some QE3 hints soon. Copper (NYSEARCA:JJC) and crude oil (NYSEARCA:USO) have also shown signs of life in recent weeks.

The bullish progress in the stock market can clearly be seen below. VTI has made a series of higher lows (green arrows) and higher highs (blue arrows), which defines an uptrend (see slope of line B). The downward-sloping trendline, labeled A, acted as resistance below the blue arrow on the left. Subsequently, VTI broke above trendline A in a bullish manner. Last week, trendline A acted as support for prices, which increases the odds of the bullish trend remaining in place for a time. The last bullish development in price has also exceeded and held above the neckline (line C) of an inverted head-and-shoulders pattern.

In a May 29 article about Greece, we noted potentially bullish divergences in numerous "risk-on" charts, making us open to a rally. Since then, the S&P 500 has tacked on 90 points from the June 4 low. Our stance remains unchanged; we respect the fundamentals problems, but will continue to give the bulls the benefit of the doubt as long as the charts allow.

Disclosure: I am long JJC.