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Technical Forecast for the Week Ahead

Technical Forecast for the Week Ahead
Simon Maierhofer
July 22, 2011

Investors and traders often ask me: “Simon, why don’t you allow a sneak peak at your Technical Forecast so I can see if it’s for me?”

The simple reason we generally don’t make the practice of “previews” is to reserve the information in regard for those who are paying for the forecast. Having said that, I think that this week’s forecast is a nice sneak peak without giving away the farm.

Below is the entire Technical Forecast for the week ahead published on July 17, 2011 (charts featured in this article are reduced due to upload restrictions):

In addition to all the “normal” news, Wall Street will be focused on two developments this week: Earnings and the debt ceiling negotiations.

I would be surprised if Congress can’t agree on some kind of deal before the August 2 deadline. White House budget director Jack Lew said that the president “made clear he wants the largest deal possible.” However, AP reports that “as a critical Aug. 2 deadline approached, the chances that Obama would get $4 trillion or even $2 trillion in deficit reduction on terms he preferred were quickly fading as Congress moved to take control of the debate.”

According to another AP report, President Obama’s goal was “to increase the debt ceiling by $2.4 trillion to make it last beyond the 2012 elections.” That’s why the pre-election year has had a solidly bullish bias every cycle since 1939, because the President does whatever it takes to get re-elected, even if it's just a band aid to the problem. Talking about the deficit solution, Jack Lew put it this way: “What these ideas do is say, let’s kick the can down the road so that others will deal with it.” Pretend and extend has been the modus operandi of U.S. and European lawmakers for years. My guess is that all the skeletons in the closet will break free no later than 2012.

Technical Forecast for the week ahead: This week will be packed with earnings releases. On Tuesday alone, Apple, Goldman Sachs, Bank of America, and Wells Fargo will be reporting. On Wednesday it’s Intel’s turn.

Just as a point of reference, I’ve marked the onset of earnings season (Alcoa’s report, first white-shaded candle) and Intel’s earnings (second white-shaded candle) in January and April. Both times stocks continued to rally through the remainder of earnings season. Many technicals suggest a repeat of this pattern.
 
                             

As you can see on the same chart, the 20 and 50-day SMA are converging at the same point, with the 20-day SMA about ready to break above the 50-day SMA. On Friday the S&P formed a green candle against the 20-day SMA. The S&P 500 futures sport the same constellation. In fact, the hourly chart for the S&P futures shows the 20 and 50-hour SMA at 1,308 and 1,309 (S&P cash index trades about four points higher).

The July 13 TF mentioned the retail sector (NYSEArca: XRT). XRT briefly closed below its daily low-risk entry level at 54.30 but bounced back on Friday (probably a bend but not break scenario). XRT also triggered a weekly low-risk entry (see March 2011 Newsletter, page 20 for more details on low-risk entry). The financial sector (NYSEArca: XLF) is within 1% of a fairly strong resistance range (14.62 – 14.67).

It is also possible to count a sloppy four Elliott Waves up from the June 16 low. Where there’s four waves, there must be a fifth (for more information about Elliott Waves see August 2011 Newsletter, page 6). A fifth wave would imply new highs or at the very least a closure of the open chart gaps at 1,353 and 1,357.

However, there’s reason not to be married to the bullish outlook. The second chart below shows one reason. There is a striking similarity between the 2007 top and now. There is a similar trend line and a triple top above the trend line. A break below that trend line could be a precursor of bad things. Next week the trend line will be at about 1,262.

                

I’ve been allowing for higher prices as long as the S&P stays above 1,298. So far, this remains the case. However, I’d also like to point out the support provided by the 200-day SMA at 1,277 and the trend line from the March 2009 lows at about 1,267. Keep this in mind if the S&P breaks below 1,298.

Summary: S&P futures are down as much as 10 points in Sunday night’s session, so there may be a gap down open. Unless proven otherwise (by a break below 1,298), we are buyers against support at 1,300 (keep in mind support at 1,304, which is the September 2008 red candle high). This week’s pivot at 1,322 and the Fibonacci 1,325 are resistance, followed by various resistances at 1,330 – 1,345 and the open chart gaps at 1,353 and 1,357. End of Technical Forecast.

The Technical Forecast is offered to subscribers of the ETF Profit Strategy Newsletter. Updates are provided at the very minimum every Sunday and Wednesday night. Yesterday's special update includes a big picture update along with the stop-loss level for long positions and the target for a market top.

ETFs recommended in the past include, but are not limited to: (NYSEArca: SPY), (NYSEArca: SH), (NYSEArca: SSO), (NYSEArca: SDS), (NYSEArca: BGU), (NYSEArca: BGZ), (NYSEArca: DIA), (Nasdaq: QQQ).

The Technical Forecast usually covers the S&P 500 (SNP: ^GSPC) but may at times include the Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), or other indexes of interest.

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