Good investors should never chase prices, but the markets do seem to be at a point where any solid pullbacks could be buying opportunities. Watch closely, and keep your cash ready for openings in any of the picks recommended by MoneyShow's Tom Aspray.
As the markets head into the news-laden weekend, the bulls seem to be taking the upper hand over the bears, as the markets closed strong. Of course, many are on the sidelines until after Sunday's Greek elections, and the quadruple expiration of futures and options on Friday also keeps many out of the market.
Certainly the news on the economy last week was more negative, with some now looking for second-quarter GDP growth to be below 2%. The increase in jobless claims and the lower than expected Retail Sales and Industrial Production numbers did not help.
Two weeks ago in "Armageddon Fears Are Overblown," it was my view that the negative sentiment was overdone. Too many seemed to be preparing for an economic meltdown. The major averages made their lows the following Monday, and the recent rally has reduced some of the anxiety.
But the question remains: Is there enough pessimism for stocks to begin a major new uptrend?
Overall, the evidence seems mixed. June's mid-month reading on consumer confidence, released last Friday, dropped sharply to 74.1. This was in sharp contrast to the final May reading of 79.3. The reading was well below the consensus forecasts, and it appears that the sharp drop in gasoline prices has not yet encouraged the consumer.
The consumer sentiment seems to be negative enough to support a low in stocks, and after the Facebook (FB) debacle, the public interest in the stock market seems to be low. The data also suggest that those who are investing seem to be quite worried.
Veteran market analyst and option expert Larry McMillan noted last Thursday that "a very powerful buy signal associated with the total put-call ratio is about to engage." Mathematically, it will turn positive with Monday's close.
A high level of put volume indicates a high level of bearish sentiment. (Larry is an old friend who does excellent work, so option traders should take a look)
The VIX has spiked above the 27 level three different times since May. This indicates that option premiums are reflecting a high level of fear. As the chart indicates, a drop below the converging support in the 21 area (lines a and b) would be consistent with a market bottom.
Other typical measures of market sentiment, such as the AAII reading on the individual investor and the sentiment of financial newsletter writers have not reached levels normally associated with a market bottom.
The AAII reading jumped from 27.4% bullish to just over 34% this week. Just over 37% of the newsletter writers are bullish, up from last week's reading of 34%. Only 26.2% are bearish, as opposed to over 46% last fall.
Looking at global sentiment, the evidence is more consistent with a market bottom, as the European Commissions economic sentiment index has dropped to the lowest level since October 2009.
It is interesting to note that there has been a sharp pickup in foreign investment in the US. A total of $28.7 billion in direct foreign investment was reported between January and March.
As the chart indicates, there was $234 billion in foreign investment in 2011, and it has risen for the past three years. Overseas buying of US real estate has been reported to be high over the past few months.
The markets this week will be focusing on the events in the Eurozone and the FOMC meeting on Tuesday and Wednesday. Of course, investors are hoping that the economic news is bad enough to spur action by the Fed, and as a result those on the short side are justifiably nervous. Recent data suggests the big banks are a favorite target of the shorts, and as I noted Friday, the shorts could get squeezed.
This week, there is a slew of housing data. As I discussed in my most recent Trading Lesson, there are signs the homebuilding stocks are close to ending their correction. Monday, we get the Housing Market Index, followed by housing starts on Tuesday.
Then, on Wednesday afternoon, we get the widely anticipated FOMC meeting announcement, followed by Ben Bernanke's press conference. Thursday follows with the latest numbers on jobless claims, existing home sales, and the Philadelphia Fed survey.
WHAT TO WATCH
Last week was a wild one, as the weekend request to help bail out the Spanish banks caused a short squeeze in the stock index futures in Sunday night's trading.
The futures opened the regular session strong last Monday, but then reversed to close the day lower. This would often mean heavier selling the following day, but instead the market closed higher and moved up for the rest of the week.
The ability of the major averages to hold firm and close the week higher has turned the short-term outlook positive. This is consistent with the bottoming action of the technical studies on June 6. These reading are consistent with a rally up to the key retracement resistance levels, which are 2% to 4% above Friday's close.
The confirmation of the positive divergences in the S&P 500 Advance/Decline (A/D) line does suggest that the worst of the selling is over. The sentiment and some of the other technical readings could form stronger bottom formations if we get one more drop back towards the early-June lows.
The large-cap stocks showed the best strength last week. The SPDR Diamonds Trust (DIA) was up 2.7% for the week, versus 2% for the Spyder Trust (SPY).
The sentiment on the technology sector seems to be especially negative, although the longer-term chart patterns are positive. I recently recommended longs in the Select Sector SPDR Technology (XLK) as well as Apple (AAPL), Intel (INTC), and Microsoft (MSFT).
The Spyder Trust (SPY) hit a low on Monday, and spent the rest of the week edging higher, but still was unable to surpass Monday's early highs of $134.25.
The 50% Fibonacci retracement resistance from the April 1 high is nearby at $134.78. The more important 61.8% resistance stands at $136.78, with the former uptrend (line a) next in the $138 area.
The S&P 500 A/D line spent most of the week above its WMA, and closed above resistance (line d) on Friday. This confirms the positive divergence that was formed in early June. It also suggests that a bottom is in place, but the A/D line needs to move through the major resistance (line c) to confirm that the major uptrend has resumed.
There is first good support at $132 to $132.50 and the 20-day EMA. A daily close under the more important support at $131.06 will set the stage for a drop back to the $130 area.
The SPDR Diamonds Trust (DIA) dropped well below the 38.2% support level in early June, but held above the 50% support level at $118.56 before rebounding in impressive fashion. DIA is up over 5.6% from the June 4 lows, and unlike the SPY has overcome the 50% retracement resistance.
The 61.8% Fibonacci retracement resistance follows at $128.19, with major chart resistance above that in the $129 to $130 area.
The Dow Industrials' A/D line improved last week, but is lagging the price action, as it is still well below the major bearish divergence resistance (line f).
The now rising 20-day EMA at $125.14 now represents first support, with more important levels at $123.85, which was last Monday's low.
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The PowerShares QQQ Trust (QQQ) traded above the 38.2% Fibonacci retracement resistance at $63.29 early Monday. A close back above this level would be a sign of strength. It picked up steam on Friday, after lagging the other averages for most of the week.
There is more important chart resistance (and the 50% retracement) at $64.40.
The Nasdaq-100 Advance/Decline (A/D) line is back above its flat WMA, and is now in a short-term uptrend. The key resistance for the A/D line is the downtrend (line a). It needs to be overcome in order to confirm that the correction is over.
The close was above the flat 20-day EMA, with further support at $61.50 to $61.70. If it is broken, we could see a drop back to the $61 area.
One thing that concerns me is the action in Apple (AAPL). The weekly chart does not show a typical corrective pattern, and it did not rally with the rest of the market late last week. It needs to close back above the $600 level to reassert the uptrend. There key support sits at $548.50.
The weekly OBV is still holding above its WMA, but turned lower last week. The OBV has major support at line c.
The iShares Russell 2000 Index Fund (IWM) had a strong week, closing up over 2.4%. It has been lagging, and as I have noted since early in the year, it topped out well above the major averages.
There is still key chart resistance (line e) in the $77.80 to $78 area, which if overcome should signal a rally to the more important resistance between $79.50 and $80.
The Russell 2000 A/D line has overcome short-term resistance, but is still well below its longer-term downtrend that goes back to the negative divergence that formed in March.
There is now first support for IWM in the $74.50 to $74.80 area.
The iShares Dow Jones Transportation Average Index Fund (IYT) was higher last week, but unlike the Dow Industrials, it has failed so far to move above the May 29 high at $92.57. If this level is surpassed, both the Industrials and Transports would be in new uptrends.
The star performers last week were the Select Sector SPDR Financials (XLF), up 2.8%, and the Select Sector SPDR Energy (XLE), which was up 2.6%. The Select Sector SPDR Health Care (XLV) also did well, gaining 2.2%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.