Weekly Technical Market Outlook 5/19/2014

The S&P 500 finished the week essentially flat, down just 0.03% while the Dow was off by 0.55% and the Nasdaq was able to pull off an almost half a percent gain for the week. Just two sectors closed under their 50-day Moving Average: Financials ($XLF) and Consumer Discretionary ($XLY).

While the equities market started to weaken after hitting new highs, we did not see the Volatility Index ($VIX) futures curve switch from contango to backwardation. Meaning, traders were not showing an increase in fear by creating a premium in front-month $VIX contracts compared to longer-dated contracts. For example, we saw the $VIX enter backwardation at the April ’14, January ’14, October ’13 lows. On Weds. I tweeted and on Thursday morning I wrote a post that we may see a spike in Volatility. During trading on Thursday we saw the Volatility Index advance by 12%, only to givemost of it back on Friday. I’m curious if we see more volatility enter the market and if the $VIX repeats its pattern of backwardation before stocks rally, or if that tiny dip was the extent of the selling. We’ll see.

Equity Trend

With last Friday’s strong bounce we finished the week relatively flat, which has kept us in this period of consolidation for the S&P 500 ($SPX). The January high of 1885 is still above us and needs to get taken out for the bulls to keep the train chugging back up to 1900. However, with the lack of lower lows we are still in an up trend.

Equity Breadth

Last Monday I discussed the double top we were seeing in the Advance-Decline Line (common stock only) as the S&P hit a new high. While the A-D Line retreated, it did not make a lower low, keeping the up trend in breadth intact. Although, when we look at the Percentage of Stocks Trading Above Their 200-day Moving Average, we did see it drop below the April low for a day before trying to reclaim the level on Friday.

Equity Momentum

Not much has changed in momentum for the S&P. The negative divergence in the Relative Strength Index is still with us, as is the divergence in the MACD.

Bonds

I can’t do a post without including a chart of the 10-year Treasury Yield ($TNX) after its strong move recently. As stocks weakened last week we saw bonds have a fairly a nice rally. The 10-year Yield broke under a support level many traders had been watching and tested the October ’13 low. While many traders were positioned and calling for higher yields, the market rarely gives them what they want and last week was a great example of this. It’ll be interesting to see if yields rebound and get back above 2.6% or if bond bulls maintain control and push them back through the prior low.

Gold

While gold ($GC_F) had a great start to 2014, it’s begun to consolidate over the last couple of weeks. The 50-day Moving Average has been acting as resistance while the trend line off the 2014 previous lows has helped provide support. As we approach the apex of the two blue trend lines we will see a break, it’s just a matter of in which direction. Looking at the Relative Strength Index for a clue, the level of resistance (shown by the red box) that plagued gold for nearly all of 2013 appears to be back in play.

When looking at the seasonal trends in gold, we historically have seen a period of weakness begin in the latter-half of May. So if the bulls are not able to regroup soon, they will be facing a tough period of seasonality along with the above mentioned levels of resistance in price and momentum.

60-Minute S&P 500

As the S&P hit a new high two weeks ago we saw the negative divergence in the Relative Strength Index break as the momentum indicator kissed the 70 level. However, the divergence is still present in the MACD indicator. With Friday’s rally we can begin to draw a trend line off the higher low, which could act as potential support on any future short-term drops. As I mentioned on the Equity Trend section, 1885 is still a critical level for the index to contend with. With each attempt to break higher, including the momentary new high, we are able to work off more supply at 1885, which is bullish for stocks.

Last Week’s Sector Performance

For the third week in a row we saw the Utilities ($XLU) sector under-perform the S&P 500. While it started off the year as a leader, we are beginning to see some deterioration in the relative performance for this defensive sector. Technology ($XLK) was the best performer last week, followed by Health Care ($XLV) and Materials ($XLB). The worst performers were Financials ($XLF) and Consumer Staples ($XLP).

Year-to-Date Sector Performance

While Utilities weakened in relative performance last week, it still remains the best performer YTD. Followed by Energy ($XLE) and Health Care. Consumer Discretionary ($XLY) and Financials still remain the only two sectors to be under-performing so far for 2014.

Major Events This Week

This is a pretty light week for economic releases. We get the FOMC minutes on Wednesday and a couple pieces of housing data later in the week. With a lack of economic data to move the market we’ll get a better idea of the risk appetite for stocks as traders are allowed to focus more on the price action and internals and less on gov’t reports.

Monday: None
Tuesday: None
Wednesday: FOMC Minutes
Thursday: Jobless Claims and Existing Home Sales
Friday: New Home Sales

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.