Mike Paulenoff

Upside Surprise for S&P?
Market insights from Mike Paulenoff & Jack Steiman

Our Wizards Mike Paulenoff and Jack Steiman weigh in this week on the direction of the markets. According to Paulenoff:

It is no coincidence that since the July 11 peak and reversal in oil prices (from $147.27) that the stock indices have had a compelling reason to climb. Of course, it has hardly been in a lock-step upside relationship, given the sudden swoons in equity prices DESPITE the relentless decline in the energy complex.

Much of this has to do with sector strength-weakness rotation (financials, energy, housing, retail, at times moving opposite one another), as well as because of the influence of earnings. In any case, the net result of the plunge in oil has been to help "unevenly" lift the S&P 500 (as shown here through it's e-mini index futures chart) above resistance at 1290/93 to 1313.50 so far.

Just about every market pundit is expecting a target of 1320/30 prior to another bout of dominant downtrend weakness. Such a consensus target just seems too neat to me, which causes me to look for an upside failure either just above yesterday's high of 1313.50 or considerably above 1320/30 -- in the 1360/70 area, which represents the area of the declining 200-day moving average.

Right now my inclination is to look for an upside surprise into the 1360/70 area; however, a decline that breaks and sustains beneath 1290.00 will begin to damage the bullish pattern that has developed since late June.

Click here for chart.

Moving over to the Nasdaq side, although the Q's gave up a substantial portion of its intraday gains on Monday, they closed right in the middle of the day's range, which qualifies as an upside continuation day in the aftermath of Friday's big upday. Furthermore, the Q's closed above the 200-day moving average for the first time in eight weeks, which also is a positive sign.

However, as of this moment I am still viewing the upmove off of the July 15 low as a counter (down) trend rally, which should fail beneath the October 2007-August 2008 resistance line, now at 49.10.

According to Jack Steiman, author of SwingTradeOnline.com:

The Dow on Monday barely closed over its breakout level at 11,750. The S&P 500 put some distance over 1293 and held late when it looked like things would absolutely fall apart. The Nasdaq Composite is on breakout, but failed at its first test at 2450 or the top of its wedge. That can't be considered failure as of yet as these critical resistance levels often take many tries before making a successful breakout.

It is a widely held belief that this market, once it reached around these levels, was doomed to fall apart. It may very well happen. But what is out there technically that suggests such a horrific fall is about to ensue? The daily charts are overbought to some degree, but we all know by now that overbought is not a true sell signal. It often means a pullback, but there's a huge difference between a pullback and a sell signal.

The weekly charts are showing a positive divergence on key index charts and near the very bottom of the MACD cycle. The 60-minute charts have the opportunity to put in a negative divergence on any push up, but the 60's have not gotten the job done. Only the daily charts can be trusted because the 60's don't always signal a big end to a rally. The downside is many of the daily's have unwound back to zero and in bad markets that's where real selling can begin. In addition, the Nasdaq did hit the top of its wedge and reversed down. Nothing horrific yet but it was rejected even if it was just the first test.

It's easy to be very bearish on this market. It has given all of us good reason to be so, but let's not throw in the towel just yet. There are opposing forces that say it won't be a slam dunk for the bears. Things could win out on the bear side, but we need lots more evidence before we can play that way.

The internals on Monday really spoke loudly. The Dow and S&P 500 weren't up much, and the Nasdaq was well off its highs, but there were 20 winners to 13 losers on the NYSE and 19 winners to only 9 losers on the Nasdaq. Although we were decently off the highs, the majority of stocks did participate to the upside. That's very critical when deciding if things will just fall apart at key resistance such as where we're at now. Yes, we could implode from here, but those internals are not suggesting such an event just yet.

The Dow's close at 11,782 does officially put it on breakout but no means should we say that it is. It's not nearly far enough above that breakout level to feel good about it although it's not a bad thing to be where it is. You just don't want to get too bullish just because 11,698 and then 11,750 got taken out. It's a start and says more is possible but you don't want to get aggressively long and go 100% in here. That could be a terrible mistake.

Click here to view Dow chart.

The S&P 500 also cleared and did so even better than the Dow but it too isn't far enough above 1293 for me to be all that happy. And again, with the Nasdaq falling at the top of the wedge at 2450 we need to ease up here and learn more about where we are.

We are appropriately positioned but we need to see far more evidence from the major indexes before throwing it all in. 11,800 Dow and above 1325 S&P 500 would be outstanding. Above 2450 Nasdaq would be exceptional. All of these numbers on a closing basis, of course.

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