How to Handle S&P All-Time Highs

World markets are mostly green this morning despite China’s growth slump. I think the slow-down was priced in, which is why the data has been largely shrugged off. S&P futures are 2-3 handles higher, with only the all-time intraday high of 1687 left as resistance. With the market at overbought levels, though, it could be difficult to chase stocks this week despite the Fed’s about-face regarding QE tapering and monetary tightening.

In life I’ve been taught it’s much better to have a “glass half-full” with a dose of realism and common sense. Being a doomsday believer and fear monger are not productive, but that doesn’t mean you don’t ignore faulty signals when they are there. For the most part this year, though, I have seen the problems facing the market as surmountable.

Technical outside days can help traders navigate intermediate-term trends, and can sometimes produce macro inflection points, especially when opinions are running rampant. One of the most important outside day reversals in the past few years took place on October 3, 2011.

Last week the market heated up after reclaiming the 50day moving average on that July 5th holiday week Friday (1627ish). Fed Chairman Ben Bernanke came out on Wednesday after the close stating that the Fed will “stay the course” adding some gas to an already overbought market. Most leading stocks are now at new highs and extended well through action/entry areas, so it makes it tricky with oscillators at the most overbought readings of the year.

The 1687 intraday high is a spot that everyone will have to make some adjustments.  We’ve had these types of pivots many times this year in the S&P: 1474, 1530, 1576, 1598 and then 1635. How the market handles these areas helps us measure intermediate-term direction.

Scenario #1: Do we get to 1687ish and then come off so Bears try to call a “double top?”

Scenario#2: Push through 1687 and squeeze shorts that have been rolling them up, induce new money flows and then close back below creating a “outside day” or “Red Dog reversal” which then usually leads to rest.

Scenario#3: We pushed through and closed above 1687 with some power. Shorts cover or roll up, new money comes in and the pain trade continues up to 1700+.

Either way, most technical signs have lead to higher prices this year. I do think it could be only a matter of time until we see 1700+. Back in the Summer of 2012 I came out with my macro “road to S&P 1700 by 2015” thesis but had no idea it could happen in 2013.

Sector analysis

XLF – The banks ETF had a nice run off the 100-day moving average since June 24 and continued to hold higher during the past few weeks. The XLF is already back at highs as it reached $20.36 level on Friday. It does feel a bit extended from the short-term moving averages, but the ETF looks like it could see higher prices as long as it holds above $20-20.35. Citigroup (C) is up around 2% this morning after its earnings report, continuing the good start to earning season for the banks.

RTH – The retail sector led the market up during this bounce type rally as RTH continues to make new highs. It broke above resistance from prior pivot highs at $53.44 on Monday, and continued to get upside follow-through. Some consolidation above $53.50ish would be constructive for higher prices.

XHB – The homebuilders saw a big gap up on Thursday to breakout of the mid-level range and reclaim the last key moving average, the 50-day. Holding above the Thursday’s gap at $30.79 would be key in the coming sessions as the ETF has room for a move back to highs at $32.50 area.

XLU – The defensive sector has been lagging the market since April, but also started to look better as it’s trying to make higher lows. Thursday’s gap up lifted the ETF to break above short-term resistance of $38. Reclaiming the 100-day at $38.70 would be the next challenge for this utilities sector ETF.

XLE – The energy sector also made a methodical move up since holding its 200-day on June 24. XLE has regained the support of all key moving averages. It’s approaching a short-term resistance level of $82. A break and close above this could open the door for a retest of the prior highs at $83.95.

It was nice to see pockets of strength in high-beta stocks last week.

GOOG – Made new historic highs as the stock broke prior high of $920.60 to go as high as $923 on Friday. The market leader looks strong and has a nice set-up for a potential breakout above $930, so keep an eye on this name.

NFLX – Had an impressive run from the breakout level of $227.47 to $257.43 last week. The stock was highlighted as a breakout candidate in Marc Sperling’s Trade Idea of The Week. It then saw a nice breakout at $227.47 level and great follow-through. It’s hard to chase after a big run, so wait for additional entry after a few periods of consolidation. Holding above $249ish would be healthy.

LNKD – After holding above its 8-day moving averages during a healthy two-day pull-back, the stock triggered our action price of $192.17 listed on the Price Point Sheet to have a nice two-day move up to $201.67 area. The $202.97 level is the all-time high. Will there be enough juice to break above this level? It looks a bit extended on the weekly chart, with the market in overbought condition. Building a base above $194-195.50 would be best for a potential breakout move.

AMZN – This stock is a beast, as it doesn’t take a break to let those who missed it get involved. After three tactical action areas at $272, $275 and 283.50, the stock continued to melt up to the upside as it reached $307.55 on Friday. It’s very extended and not prudent to initiate new longs. At this point it would be a better strategy to look for a Red Dog Reversal at highs for a cute short.

TSLA – Gave us another calculated entry at $126 on Friday and went as high as $129.94. The stock has been acting well and continues to be a great trading vehicle. It closed on dead highs on Friday, signaling potential upside follow-through. Keep an eye on this hot stock, as it joined the Nasdaq 100 to replace ORCL today and could see some volatility from this event.

Quick hits

BIIB – The stock saw some choppy action last week, but the daily chart looks good as it has a tight mid-level consolidation range and looks poised for a potential breakout above $226 level after basing above the key moving averages for almost three weeks.

FB – The stock started to act better as it broke out on Tuesday at $25 and held above it, which is constructive. It’s hovering around the 200-day and has some resistance at the 100-day at $25.93, but holding above $25.45 could keep its momentum intact for a break above these key moving averages.

FSLR – Saw a nice two-day snap back and looks poised for a potential breakout of the mid-level range at $47.50ish. A break and close above the 50-day at $48.30, which is serving as some short-term resistance, could add some power to its rally.

GLD – The metals got some attention last week as GLD was grinding higher and trying to reclaim the 21-day moving averages. Holding above $122 could be constructive for a move back to $130.38 area where the gap from June 20 would get filled.

TBT – The 2x Inverse Bond ETF held above its 21-day and rallied on Friday off $74.39 level.  It held half of the gap from July 5. A break and close above $76 could set it back in motion.

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