Breakfast with Brodsky
The breakout on Friday will of course be attributed to short covering, which it very well may have been, but we rallied nevertheless. The jobs data will be looked at as the spark that ignited the rally, but as the S&P and Dow broke out of those descending trendlines (which were pointed out on Friday) we had clear sailing throughout the day.
The obvious question now, is if the breakout is real or simply a bounce from oversold conditions. In both the S&P and Dow there is a head & shoulders pattern that had formed over the past month and a half. This is a pretty bearish technical formation that was making me nervous and if the bottom had been broken (10,450 in Dow and 1120-1122 in S&P) that could have sent this market into a much-talked about and anticipated correction. These patterns were canceled out on Friday since we were able to close above the highs of the left shoulders that were made in early January. The 1132-1135 level was the trigger in the S&P and the Dow was able to close right on its left shoulder high of 10,592.
Looking at the NDX it seems we were able to hold the support level of its 50-day ma (1469) and the 50% retrace of its latest move. A descending trendline was also breached and we closed right under near-term resistance of 1500-1507. While we certainly could be back in an up-trend, it seems a bit premature to rush out and get totally bullish. The last few days have been met with some serious volatility which means there are plenty of cross currents out there and this week could be as wild as last.
The BTK (Amex Biotech) is in a nice correction channel where it has been since mid-January. The levels for the channel are: support at 508 and resistance at 525. A break above 525 could send this index into another strong up-move. The SOX (Phil Semi) has reversed course and was able to close above its 60-day ma (514) and right under its 30-day (524) which is the next resistance level. Taking a little bit bigger view of the SOX one can see a triangle setting up. Connecting the highs from January and the lows from October, December and February (if they hold) we see that the SOX may be range bound until the top or the bottom of the triangle is breached. A quick note: That triangle, if the ranges hold, does not converge until the end of March (when the drawn trendlines intersect.)
The banks seemed to have reversed course as well and the BKX closed right below 1000. In my opinion, the index still looks healthy but I wonder if this group's risk/reward to the long side is somewhat limited. Yes, the Fed rate hike may not happen for sometime, but it appears that it will happen at some point. Does that mean that we may see the banks lag some? I am probably too early on this call but the market does discount 6-9 months out. Retail seems to be back in favor as the IRH could be about to breakout of a descending trendline that traces back to early November. The RTH (Retail ETF) has been moving higher on increased volume and was able to close above 91.53, which was the trendline. Look for resistance to come into the market at 94.
Lastly, the XAU (Gold/Silver) gapped higher on Friday and was able to close above 100. Look for resistance at 103 and support to come into the market at 96-97. Good luck!
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