The market looked a little tired as we concluded trading last week. Clearly there was some sector rotation in the market as investors looked for the next winning trades. Also, there was some selling in the metals space as the dollar heated up. Healthcare was strong, led by pharmaceuticals and HMO’s. Railroads were a leadership area as they broke out of a trading range and look poised to continue higher. Agricultural/chemical stocks outpaced the market last week on strong earnings reports. Homebuilders were a big winner last week. Financials were up until more mortgage related negative news hit the tape on Friday. Is has been a long time since financials, homebuilders, and healthcare outperformed metals.
The rising dollar has put gold under pressure in 2011. Commodity groups like energy, gold, natural gas, steel and coal traded off as the dollar rallied last week. The dollar has rallied near resistance at its 200 day moving average. GLD (gold ETF) fell below its 50 day moving average for the first time since August. How the dollar reacts at resistance will give us insight into how the metals complex will act near term.
There were some signs of distribution last week. The SPX is now trending along its rising 10-day and 20-day exponential moving averages. The question is if the market will consolidate recent gains or pullback. The near term trend could change if last week’s low of 1260 is broken. If 1260 gives way the 20 day exponential moving average of 1254 will be a key area to determine if the uptrend is still intact. The market began its latest run at 1173, with the high of the move at 1278. So, let’s get back to some more arithmetic to see where the market could go if we see a pullback. I know it is a Monday but there are times when we must do our math homework. I tell my kids that every day as they gripe about doing their homework. The targets for a potential pullback are based on the last move higher. Key levels to look at are 38.2%, 50.0% and 61.8% of the recent advance. The last leg of the market advance started at 1173 and has topped out at 1278, 105 points. So, pullback targets are 40 points (.382*105), 52.5 points (.50*105) and 65 points (.618*105). Therefore, the retracement targets for the market if we do pullback are 1238, 1225, and 1213. In my piece "Riding The Fifth Wave" I did set a target for this advance in the 1289-1292 range for the S&P 500. Earnings season, which starts in earnest next week, will heavily influence if we reach that lofty target. The high last week left us just over ten points shy of that target set last year.
If the market can hold the 1260 level on the S&P 500 and the Dow remains above 11575 we’ll remain in a consolidative phase. If those levels give way we’ll see the market correct for the first time in six weeks. The levels above will allow you to gauge the extent of the pullback.
