Charting Market Moves: More Uptrend or Correction?

Stocks moved higher this week to log record-high closes for the Dow Jones Industrial Average (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY). The Dow closed at 15464.30, a new record, and near its all time intra-day high of 15,542 reached on May 22, 2013. For the week, the Dow was up 2.2 percent while the S&P 500 added 3 percent to reach another closing record high at 1680.19. The Nasdaq (NYSEARCA:QQQ) gained 3.5 percent for the week.

The rally was largely triggered by Dr. Bernanke’s dovish statements mid-week that loose monetary policy and low interest rates were going to be around for a long time to come.

On My Stock Market Radar

Chart courtesy of StockCharts.com

In the chart of the Dow above, we can see how the recent action has brought the index back near its all time intra-day highs set back in mid May. The average is reaching overbought levels but is in a strong uptrend with strong momentum. Nevertheless, the double top formed earlier by the intra-day highs needs to be smashed for this rally to be confirmed.

Furthermore, the chart of the NYSE Bullish Percent, which indicates the percent of NYSE stocks on “buy” signals, tells us that the Dow is now in bear correction mode.

Chart courtesy of StockCharts.com

Bear correction signals mean that he point and figure signal is still on a “sell” signal, however, the current column is in a column of Xs which means that demand is currently in control of the market. A break above the previous column of Os is required to confirm a new advance and so, in spite of recent new highs and the recent powerful rally, the NYSE remains in correction mode.

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All of the recent action reflects today’s environment which is still “all about the Fed, all the time.”

Dr. Bernanke set off the recent correction with his comments in May and since then, various Fed Presidents and the Chairman, himself, have been trying to back peddle and ensure markets that the easy money environment was going to continue.

Their efforts have been successful as major indexes are now back at levels last seen before Dr. Bernanke’s first comments.

Markets will continue to be whipsawed by Fedspeak and “taper talk” and Friday was no exception as Fed Presidents Charles Plosser and James Bullard presented conflicting views of “to taper on not to taper.”

This confusion and disarray within the Fed could prove to be dangerous should investors lose faith in the central bank’s power, and last week’s resignation of Fed Governor Elizabeth Duke, a supporter of Dr. Bernanke’s policies, further muddies the waters.

Of course, it is now becoming widely accepted that Dr. Bernanke will also be leaving the scene when his term expires in January and markets will be eagerly watching to see who his replacement will be.

In economic news last week, weekly jobless claims rose, consumer sentiment fell and prices rose more than expected.

United Parcel Service (NYSE:UPS) was hammered 5.8 percent on Friday when it lowered its earnings guidance and warned of a slowdown in the U.S. economy. Seen as a bellwether of global economic growth, this is just one more canary in an increasingly crowded coal mine of dead canaries. Dr. Bernanke and the FOMC remained the brightest notes for the week by stressing rates would stay low for an extended period even though tapering of bond purchases might be on the horizon.

The upcoming week will likely focus on China (NYSEARCA:FXI) as the country last week reported that its June exports and imports fell and analysts expect a sharp slowdown in the country’s GDP. Read ETFs For The Slowdown In China

The upcoming week will also bring significant news on both the earnings and economic news fronts.

Significant earnings reports include:

Monday: Citigroup (NYSE:C)
Tuesday: Coca Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ), Yahoo (NASDAQ:YHOO)
Wednesday: Bank of America (NYSE:BAC), Intel (NASDAQ:INTC), IBM (NYSE:IBM)
Thursday: Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Morgan Stanley (NYSE:MS)

Friday’s reports from Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) seemed to satisfy investors and so the upcoming earnings season will be again closely watched to see how corporations are holding up against the ongoing global slowdown.

Significant economic reports include:

Monday: Retail sales, Empire State Index
Tuesday: Consumer price index, industrial production, home builders index,
Wednesday: Fed Beige book, Bernanke House of Representatives testimony
Thursday: Philadelphia Fed report, Bernanke testimony in U.S. Senate, leading economic indicators

Other important developments come Sunday night, July 14th, with the release of China GDP numbers and what impact a slowdown there might have on global financial markets. Uncertainty buzzes about whether China will have a “soft” landing or a “hard” landing and the answer to this question is likely to ripple around the world.

Analysts have busily been cutting GDP growth estimates for China with notable reductions coming from Citigroup, the International Monetary Fund and the country itself, with the expected growth rate dropping to 7 percent or less for 2013.

Problems in China include its shadow banking system, rising unemployment, too much debt and acres of empty apartment houses and shopping areas.
7 percent GDP growth seems to be the line in the sand between “good” news and “bad” news but even weak GDP growth could be “good” news in today’s easy money world of global central banking.

Bottom line: Lots of news coming this week will provide the fundamental underpinning for further advances (or not) into record territory for the Dow and other major U.S. indexes. Technical indicators point to an ongoing uptrend but a market still due for a significant correction. With Dr. Bernanke heading to Capitol Hill, it promises to be another exciting week.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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