TomAspray's  Instablog

The world markets had the widest ranges last week that we have seen in quite a while. An increase in volatility is often seen prior to a more extended correction. It was a plus that the major averages, especially the stock index futures, closed last week above the prior week's lows.

Many of the averages did form daily key reversals on Wednesday, but they have short-term significance when not accompanied by other technical negatives. As I discussed a few weeks ago, a sharply lower weekly close is often the first sign that a top is being formed.

The German Dax closed the week down just over 1%, even though the country's latest reading on business confidence was the best in several months. And though many of the US averages closed the week over 1% lower, the recent highs were confirmed by both the weekly and daily technical studies. This suggests that at worst, we are in the early phases of the top-building process.

The market's problems started Wednesday, as the comparison of Ben Bernanke's comments with the FOMC minutes that had just been released spooked investors. The concern that Fed's bond-buying program might end earlier was the reason to sell.

The competition to outdo one another on the various financial networks is fierce, but I would recommend that investors not pay attention to these Fed whisperers. Keeping an eye on what the weekly and monthly market data will be much more illuminating, as major trend changes show up on the technical side well ahead of the fundamentals. For instance, the homebuilders completed their major head-and-shoulders top formation in 2006, well before the housing market collapsed.

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Global rates moved higher last week, but interestingly, the increases were the most pronounced in the bonds of the strongest countries, the US and Germany. The uptrends in the yields of the German ten-year Bunds and the US ten-year T-Notes (line a) shows a sharp increase since the start of May.

In contrast, the yields on the Italian ten-year bond have just risen slightly (line b). Rates on Greece's ten-year are still basically in a downtrend (line c), but have fallen from the extremely high yields of a year ago.

Also, a gradual increase in rates is not always a negative for the stock market. It could encourage some bondholders to shift from bonds to stocks.

On Monday, I will be releasing a special report discussing my outlook for US rates. The recent increase in both long- and short-term yields has brought them to levels where they are close to completing weekly bottom formations. One should keep in mind that it would take much higher yields to reverse the major downtrend.

Over the past few weeks, in columns like Put the Odds in Your Favor Now, I have been advocating raising cash and taking profits. The percentage of cash in the Charts in Play Portfolio has increased significantly in the past two months.

The next few weeks are likely to be equally difficult as a fewer number of stocks will be able to go up significantly if the overall market does correct more sharply.

The Performance chart below shows that stocks have been the only game in town in 2013, as the SPY is up 15.6%, while bonds as represented by the iShares Barclays 20+ Year Treasury Bond (TLT) are down about 3.4%. Emerging markets, represented by Vanguard FTSE Emerging Markets ETF (VWO), have lost just over 4% so far this year.

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Of course, the Spyder Gold Trust (GLD) has been the real casualty, having lost over 17% so far this year. It is now retesting the lows from the middle of April. And silver has been getting even more press as prices have realty crashed.

Over the past two weeks, economic data has generally been quite good. The consumer sentiment data released on March 17 was much stronger than expected, as it jumped to 83.7, up from 76.4 the prior month.

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Last week, existing home sales and new home sales were both better than expected. Durable goods were also well above expectations. The data on manufacturing was also encouraging, as the flash PMI Manufacturing Index and the Kansas City Fed Manufacturing Index both reflected steady growth.

This week, we get a host of new data, which should help investors get a better reading on the economy. After the long weekend, we get the S&P Case-Shiller Housing Price Index and consumer confidence numbers on Tuesday. Also, we get more data on manufacturing from both the Richmond and Dallas Fed surveys.

The declining jobless claims have been a strong positive factor for the market, and we get the next reading on Thursday, along with the first revision of first-quarter GDP. Friday brings the personal income and outlays data, Chicago PMI, and the final monthly reading for May on consumer sentiment from the University of Michigan.

What to Watch
From May 14, prices accelerated to the upside until Wednesday's reversal, which must have really punished some of the perennial bears who never thought the S&P 500 would get to even 1,600 or 1,625.

Friday's close was mixed. The Dow finished up, while the S&P 500 and Nasdaq were down slightly. All were sharply lower in early trading, just like Thursday. The market's resilience is impressive, and is a positive sign for next week's trading.

They market's outlook is still bullish, despite last week's losses, and we still do not have firm sell signals from either the daily or weekly technical studies. On May 15, a total of 517 stocks made new highs on the NYSE, which is consistent with a positive major trend.

Though this was not mentioned in Thursday's column, 3 Reasons to Avoid Panic Selling, it was another good reason to stick with your plan and the stops that you worked out before the reversal.

At Thursday's low of 1,636, the S&P 500 was already 3% below Wednesday's highs. I would not be surprised to see prices get back toward these highs in the next week or two, but given the nature of Wednesday's reversal, they may not be exceeded.

Bullish sentiment of individual investors jumped again last week, according to AAII, as 49% are now bullish, up from 38.5% the previous week. Only 21% are bearish now, which is the lowest reading so far in 2013. This number will likely jump this week.

Financial newsletter writers have continued to become more bullish, from a low of 44.3% on April 24, to 55.2% currently. Only 18.8% are bearish, which was a level last seen a few weeks ago.

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The weekly chart of the NYSE Composite shows that the weekly Starc+ band and upper channel (line a) were both tested last week. The NYSE came close to closing below the prior week's low at 9,397 but it did not.

There is next good support at 9,256, and then the rising 20-week EMA at 9,060. This is approximately 3.8% below Friday's close.

The 38.2% Fibonacci retracement support from the 2011 lows is at 8,441, which is more than 10% below current levels, and also corresponds to the uptrend (line b).

The weekly NYSE Advance/Decline line did make new highs two weeks ago, but turned lower this week. The WMA is still rising strongly, but could be tested on a further correction.

S&P 500
The Spyder Trust (SPY) almost reached the daily Starc+ band with its high at $169.07 last week. By the next day, it was already back to the Starc- band. The next support is at $163.65 and the flattening 20-day EMA.

There is more important support at $159.71 (line a), which was the April high. The daily uptrend (line b) is at $157.50, with the 38.2% retracement support at $155.94. This is about 5.4% below Friday's close . This is a potential downside target if a top is confirmed.

The daily S&P 500 A/D line did make a new high last week, and closed Friday just barely below its rising WMA. The A/D line is still above its short-term uptrend (dashed line) and well above long-term support ((line c).
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Dow Industrials
The SPDR Diamond Trust (DIA) had a high last week of $155.14, which was very close to its Starc+ band. The low Thursday was $151.55, which now provides first support. There is also converging support at $148.69 and the uptrend (line d).

The daily Dow Industrials A/D line did close well below its WMA on Friday. But typically before a top is completed and the selling becomes more serious, the WMA will flatten out, which takes a week or more. The A/D has next good support at line f.

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Nasdaq-100
The PowerShares QQQ Trust (QQQ), after closing the prior week above its weekly Starc+ band, formed a doji on Monday. So with Wednesday's reversal, an LCD was triggered (highlighted in yellow). It closed down approximately 1.4% for the week, and was the weakest of the four.

QQQ made lower lows on Friday, but still closed above the 20-day EMA at $72.67. The September high at $70.58 area now becomes an important level of support. There is further support at the April high of $70.15, followed by the 38.2% Fibonacci retracement support at $69.72.

The Nasdaq-100 A/D line did form a slight divergence last week, and is acting the weakest of the five A/D lines that I follow. It closed the week below its WMA, which has started to flatten out. The next support for the A/D line sits at the April highs (line b).

There is now a band of resistance in the $73.70 to $74.40 area.

Russell 2000
The iShares Russell 2000 Index (IWM) reached the 161.8% Fibonacci retracement target from the March-April correction early Wednesday, before reversing to the downside. The 20-day EMA was tested late last week. The next support is at $95.10, which corresponds to the March highs.

There is additional support at the breakout level (line d) of the flag formation. In early May, you will recall that the "measured target from the flag formation was in the $99 to $101 area." The high last week was $100.38.

The daily OBV did not confirm the recent highs, but is still holding above its WMA. A strong close early next week could still cause the OBV to break out to the upside. There is important support for the OBV at line g.

The Russell 2000 A/D line did confirm the price highs and is trying to hold above its rising WMA. There is further support for the A/D line at the March highs and then the uptrend (line h).

NEXT: Sector Focus, Commodities, and Tom's Outlook

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Wednesday was one of the widest ranging days since the middle of April with a 277 point range in the Dow Industrials and 41 points in the S&P 500. The overnight selling in Asia was exacerbated by a drop in preliminary readings on Chinese manufacturing.

The European markets are also down sharply with the German DAX Index down 2.6% in early trading and the US futures are sharply lower ahead of the latest data on jobless claims that will be released ahead of the US market's opening.

Several of the major averages formed what is known as key reversals in yesterday's trading. This chart shows the NYSE Composite (NYA), which opened Wednesday at 9605, above the prior day's close at 9598. NYA made a significant new high early in the day at 9695, then closed at 9508, which was well below Tuesday's low at 9556.

The weakness in the asset management stocks after Tuesday's close looks to have been an advance warning of Wednesday's drop. Does this mean investors should be selling their stocks?

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Chart Analysis: The NYSE Composite tested its daily starc+ band Wednesday before reversing to the downside as noted above.

• The 20-day EMA is at 9411 and is likely to be exceeded early Thursday.
• There is more important support at 9265, which corresponds to the April highs, line a.
• This is 2.5% below Wednesday's close, and it is the likely first downside target.
• The 38.2% retracement support from the November 2011 low is at 8984, which corresponds to the support at line b.
• The NYSE Advance/Decline line confirmed the recent highs before it turned lower.
• The rising 21 WMA is now being tested with further support at the uptrend, line d.
• There is more important support for the A/D line at line c.

The Spyder Trust (SPY) also formed a key reversal on Wednesday and volume was double the daily average.

• The daily starc- band and the 20-day EMA are now at $163.28.
• The April highs at $159.80 (line e) represent more important support. It is 3.6% below Wednesday's close.
• The uptrend (line f) and the 38.2% Fibonacci support is now in the $155.94 area.
• The major support is at $153.55, which was the April low.
• The daily OBV confirmed the recent highs and is now testing its WMA.
• There is next support for the OBV at line g.
• The S&P 500 A/D line also confirmed the recent highs and is still holding above its WMA.
• The uptrend in the A/D line (line i) and more important support are considerably below current levels.

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The Powershares QQQ Trust (QQQ) also formed a key reversal on Wednesday and closed below Monday's low at $73.89, so an LCD was also triggered.

• QQQ is still well above the 20-day EMA at $72.52.
• There is more important support at the September high of $70.52, line a, which is just over 4% below current levels.
• The 38.2% Fibonacci support is at $69.72 with the 50% at $68.11 along with the uptrend, line b.
• The Nasdaq 100 A/D line has confirmed the recent highs but turned lower Wednesday.
• There is further support for the A/D line at the April highs with long-term support at line c.
• There is resistance now in the $74-$74.95 area.

The iShares Russell 2000 Index (IWM) had a new all-time high at $100.38 before closing at $97.78.

• The daily chart completed its flag formation, lines d and e, in early May.
• The 161.8% retracement target at $99.07 was exceeded on Monday.
• There is next important support in the $95.10 area and the 38.2% retracement support (not shown) from the November lows is at $91.06.
• The daily OBV tested the recent highs, line f, but did not confirm the new price highs.
• There is key OBV support now at the uptrend, line g.
• The Russell 2000 A/D line did make new highs this week and is still above its WMA.
• The A/D line now has more important support at line h.

What it Means: The confirmation of the new price highs by the weekly and daily NYSE A/D are two solid reasons why you should avoid panic selling. They indicate that after correcting further there should be another rally phase before a significant top could be completed.

The confirmation of the new highs by both the weekly and daily OBV on the Spyder Trust (SPY) and the fact that they have not yet broken important support is another reason not to panic. This indicates that more time is required before significant sell signals could be generated. Both the OBV and A/D lines generally lead prices as was the case last December.

The SPY has a minor target at $163.28 and should hold above the support in the $159.80-$162 area before it rebounds. The iShares Russell 2000 Index (IWM) does look more vulnerable.

I would not chase the inverse ETFs at these levels as they are likely to open much higher, but if a top is confirmed, there will be a better risk/reward entry at a later time. Be sure you have your stops in place and avoid any panic selling.

How to Profit: No new recommendation

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

As the stock market continued to grind higher, some lagging industry groups have started to join the party as many have started to catch up with the overall market. Many of the coal stocks had sharp gains Tuesday as the Nonmetallic Mineral Mining group gained over 3%.

In early trading, the stock index futures are trading higher and the NYSE Advance/Decline has continued to make new highs confirming the higher prices. Many stocks, as noted Monday, are trading above both the weekly and monthly starc+ bands making them high-risk buys at current levels.

Also, some of the stocks in the hottest sectors are starting to show signs that they are topping out as investors are trying to lock in some profits and buyers are looking elsewhere. One top group, the DJ US Asset Manager Index is up 29.7% for the year versus a 14.4% gain in Spyder Trust (SPY).

A technical look at some of the key asset manager stocks reveals why now may be a good time to take some profits as a 5-8% correction would just take them back to support.

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Chart Analysis: The daily chart of the DJ US Asset Manager Index triggered an LCD Tuesday as it closed at 155.19, which was below Monday's doji low of 155.34.

• There is next support at 152.92 with more important in the 146.50 area.
• This corresponds to the breakout level (line a) and the rising 20-day EMA.
• A close below last week's low at 147.92 would be much more negative.
• The relative performance confirmed the recent highs, and it is still well above its rising WMA.
• The daily OBV broke through resistance, line c, on April 22, which was two days after the low at 134.65.
• There were no divergences at the recent highs but it has turned lower.

Franklin Resources Inc. (BEN) is a $35.19 billion asset manager that provides a wide range of services. BEN made a low of $144.10 in the middle of April and a new 52-week high at $169.62 on Monday when a doji was formed.

• The close Tuesday was well below Monday's low so an LCD was triggered.
• The 38.2% Fibonacci retracement support from the late 2012 lows is at $152.
• The uptrend, line d, is at $150.23 with the 50% support at $146.58.
• The relative performance is still positive but it did not make a new high on Monday.
• The on-balance volume (OBV) formed a negative divergence on Monday (see arrow) and broke its uptrend, line f, on Tuesday.
• Monday's high was $169.62 with the R3 pivot resistance at $173.54.

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Kohlberg Kravis Roberts & Co. (KKR), a $5.52 billion investment firm, has not made a new rally high since April 25 as it has moved sideways.

• There is now key short-term support at $20.25, line a. A close below this level should complete a short-term top.
• The 38.2% retracement support from the December low at $13.35 is at $18.50.
• The more important 50% support level is at $17.50.
• The uptrend in the relative performance, line b, was broken last week as it appears to have topped out.
• The OBV made marginal new highs in April but then broke support on May 9.
• The OBV just barely moved above its declining WMA before turning lower Tuesday.
• The quarterly R1 resistance at $21.14 seems to have limited the upside and represents initial resistance.

Invesco Ltd. (IVZ) is a $15.3 billion asset management company that was originally recommended in March's column 4 Strong Stocks in Top Sectors.

• IVZ made a high of $34.95 on Monday and closed below Monday's low Tuesday.
• Last Friday, another doji was formed with a low of $34.31 and a close below this level would complete a LCD.
• There is further support in the $33 area with the minor 38.2% Fibonacci support (from the March lows) at $31.35.
• There is more important support in the $30-$30.36 area.
• The relative performance is declining and has been diverging from prices for the past week.
• The daily OBV did confirm the highs and continues to look strong.
• The OBV has good support at line f and the rising WMA.
• For the past three weeks, IVZ has traded above its weekly starc+ band, so risk is high.

What it Means: The number of negative formations in the asset manager stocks suggests they are ready for a pullback. There are no signs yet of a top for the financial sector so this may just be sector rotation and not an early sign of a market correction.

How to Profit: No new recommendation

Portfolio Update: Should be long Invesco Ltd. (IVZ) from $27.73 and sold half at $33.22. Would sell the remaining position on the opening (advice was tweeted before the opening).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.