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The Week Ahead: How Far Can the Bull Run?

|Includes: DIA, GLD, QQQ, SLV, SPDR S&P 500 Trust ETF (SPY), XLE

The markets seemed to breathe a sigh of relief after Ben Bernanke's widely anticipated press conference.

His comments seemed to calm the inflation fears for now—and surprisingly, a preliminary survey from the University of Michigan showed that expectations are for a 2.9% CPI for the next five years. Over the next year, a jump in inflation is expected.

The silver market dominated the news last week, as many are trying to pick a top. Though silver is likely to see a 10% to 20% decline in the next few months, trying to pick a top in any commodity market—as most experienced traders will tell you—is very hazardous to your economic health. Exemplifying this, those who sold gold were squeezed Friday, as it closed up $32 per ounce.

This week's gain in the stock market reinforced the positive intermediate term as the NYSE Composite A/D line made further new highs. However, in my view the bullish camp is starting to get a bit crowded. As I discussed Friday, there are also some early warning signs appearing that suggest a more defensive strategy is warranted as the market moves higher.

Earnings reports were the focus last week, and this week should be no different. Many of the energy companies, such as Chesapeake Energy (CHK), Marathon Oil (MRO), Suncor Energy (SU), Murphy Oil (MUR), Williams (WMB), and El Paso (EP) all report this week. Drug giant Pfizer (PFE), Clorox (CLX), and semiconductor manufacturer NetLogic (NETL) are also reporting.

Jobs will be on everyone's minds this week, starting with the ADP Employment Report on Wednesday. On Thursday we get jobless claims, and then the monthly employment situation report follows Friday. Other data includes the ISM Manufacturing Index on Monday and factory orders on Tuesday.

The Euro continued to move higher, after breaking though major resistance a few weeks ago, and it helped boost many of the European stock markets. But only the German Dax was able to make new highs for the year, while London's FTSE-100 and the French CAC Index climbed but remained below their February peaks.

WHAT TO WATCH

S&P 500
The Spyder Trust (SPY) is getting close to the 127.2% retracement resistance at $137.50, but it may have trouble surpassing the resistance in the $139 to $140 area on the first attempt. The longer-term target is still $143 to $145.

SPY has first good support now at $134.70 to $135.30, with stronger levels at $132.50.

Dow Industrials
The close last week in the Diamonds Trust (DIA) above the previous highs at $124.35 was a very positive sign, as the next targets at $128 have been reached.

The next key barrier on the upside is in the $129 to $130 area (Dow 13,000). If this level is surpassed, watch the May 2008 highs at $131.

There is initial support for DIA is at $125.50 to $126.50, and then at $124.70. It would take a break below $120.65 to turn the chart negative.

chart
Click to Enlarge

Dow Transportations
The Dow Transportation Index had been lagging, but caught up in a hurry last week, gaining over 4.2% for the week to surpass the May 2008 highs at 5,536. The weekly chart shows a powerful breakout of the trading range (lines a and b). This action projects a move to the 5,900 to 6,000 area.

The OBV has been leading prices higher, and made further new highs last week. It is in a strong uptrend (line c). Strength in the railroads has given the Transports a boost as they benefit from higher energy prices.

Nasdaq-100
The PowerShares QQQ Trust (QQQ) has moved slightly above the February highs, but made little upside progress late in the week. This suggests QQQ may need a pullback to the support at $58.30 to $58.70 before it can challenge the targets in the $60 area.

The Nasdaq-100 A/D line, unlike the A/D line on the Nasdaq Composite, has moved above the February highs by a significant margin (line d). This is a clear positive for the intermediate term outlook.

Good support for the A/D line now at the April highs (line e) with more important levels at the April lows (line f).

Sector Focus

  • All of the major sectors except technology and the financials have failed to surpass the February highs. I continue to favor the more defensive Consumer Staples Select Sector SPDR (XLP) and Health Care Select Sector SPDR (XLV) for new stock selections. Look for stocks in these sectors that have either just bounced from good support, or have just cleared multi-year resistance, as this should allow the risk to be better controlled.
  • The Energy Select Spyder (XLE) closed strongly Friday, and has cleared the strong resistance at $79.90 to $80.37. This suggests earnings for energy companies this week may beat expectations. The next targets wait in the $82.50 to $83 area.
  • The Financial Select Spyder (XLF) has just rallied to test the declining 50-day MA in the $16.50 area, and still needs to move above the resistance at $16.75 to stabilize the outlook. The technical outlook has improved slightly, and a resurgence in the financials would clearly give the overall market a boost. Key support sits in the $16 to $16.20 area.

NEXT: Oil, Gold, and the Dollar in the Week Ahead