Weekend Update: Goldilocks Jobs and S&P 1,700

Another week in the books and another new high in the major averages. The July Job's Report came out Friday morning and was not too high and not too low, it was just right for the economy to show improvement and keep the Fed's pedal to the metal. With stronger than expected data points this week, the market took off from its 3 week consolidation and broke through the 1,700 level. The level by itself is not that meaningful, but people like psychologically pleasing round numbers. What is interesting about the breaking of the 1,700 price on the SP500 is that it is the key target for many short term traders within the bloggosphere (not me however). It has drawn a lot of attention from round number type people and therefore has some significance. There are two things I noticed this week with the 1,700 test in mind:

1. Being that this is the level that most are watching and targeting, it is interesting to me how few believe that the market will just power through it and continue higher. The broad consensus is that this will be THE top for the market and a pullback is imminent. The action however is leaving Shorts feeling squeezed, and under-invested Bulls praying for a top. Typically when this dynamic exists the market will do what it does best, make the herd look foolish and inflict maximum pain. Seeing that the Fed has posted its new Buy Schedule for August and econ. data continues to show gradual improvement, we should have clear skies above. The thing about all-time highs is that there is no overhead supply in the market (resistance). There are no levels where Bulls have bought in and are now trapped; everyone has a profit and are not in any hurry to sell as things seem to be looking good. This creates a situation where Fed funds continue to buy any and every dip, currently invested players hold their positions, and the under-invested and short positions continue to be dragged along for the ride... Prices continue to grind higher.   

2. The other mildly interesting sentiment check I witnessed was Thursday listening to the local FM radio. I was tuned into a fairly progressive, small rock n roll station here in Portland and I happened to catch their obligatory, mid-day 5 minute news segment. One of the DJ's was reporting on the SP500 eclipsing the 1,700 milestone. Initially I was a bit worried, when KINK FM starts talking stocks my radar goes up a bit (usually when normally unassuming folk start to gain an interest in the market it has likely gotten overheated, historically speaking). She was saying that strong earnings where a cause and blah blah. Clearly she is someone who doesn't follow the financial markets with any interest and neither does her cohort. He made some sarcastic "ya-hoo!" about her news and then they both had a little chuckle. After they finished their scoffing fit, the reporting DJ made an off-the-cuff remark that even at these new highs and with an improving economy, the market was still not to be trusted and could plummet at any moment. That was when I got to breathe my sigh of relief. Normal people still hate the market, good. The more casual non-believers we have, the more those potential participants have under-invested dollars that will (at some point) find their way into stocks. This is by no means hard evidence, but it gets back to the idea that this market is far from euphoric and still has much to prove before "the every-man" finally gets on board.  

Here is a look at the Daily Chart for the SP500 at these new breakout highs:

Another new high and a new higher low we can trade against. Short term positions can be added here with stops placed below the July 26th low. A break of this level will also likely coincide with a failure of the uptrend support. I added some short-term positions Friday into the close and will hold those trades with 1,676 as my initial stop. There is a large confluence of support at the 1,676 level as that was also where the prior rally highs topped out in mid may and then where price has found support through this recent consolidation. A quick breakdown of that low will signal a false breakout on the S&P and will alter our stance on current, short-term positions.

Longer-term things look very strong here as we take a look at the Weekly Chart:

The market is quickly retesting the uptrend channel resistance after pulling back on the last test in May. This is bullish activity and shows just how strong the advance has been. As long as price can hold above the rising 20 WMA and above the prior swing low at 1,560, this market is still on its way higher. It is possible that once prices retest the upper trendline that some weakness comes along, but we will wait until we actually see that. Right now there are so many stocks breaking out to new highs and forming bullish patterns that we have to stick with this trend as long as we can.

The Blog Portfolio added two new positions this week: DDD and new prospect PPG.

Currently we hold 14 open positions:
XLF, XLY, XLK, XLI, XLE, XLP, XLV
HAIN, HD, F, DDD, PBW, WFC, PPG

Cash:
XLB, XLU
AAPL, ENB, CMI

Let's take a look at our newest additions and then a look at some of our more interesting laggards:

DDD

Well we got our entry signal in DDD this week on the big pre-earnings breakout. Unfortunately the breakout did not hold as the earnings report saw a "sell the news" response. However, initially the stock was down some 9%, it rallied back to close down only 2% on the day. Wednesday, Thursday and Friday saw some post earnings churn as price held very stable just below channel resistance. The stock has held a tight range between $45 and $49 so we will be looking for a move below the $45 support level as our stop. This sort of multi month consolidation at all-time highs resistance is bullish behavior and I expect a resolution higher from here.


PPG

PPG was our new prospect addition this week as we lost MOS as a viable candidate. I have followed and owned this stock for some time in my personal accounts and the MOS breakdown this week provided me an opportunity to add this perennial winner to our watch list. Also this week we got the signal to buy into this monster gainer with a breakout on our weekly RS indicator and a close at new all-time highs. Being that this is such a persistent trend, we will want to ride it as long as we can. Our stop will be placed just below the prior swing low at $144.50 which also coincides with the intermediate uptrend support. A strong level there!


AAPL

AAPL is getting very close to signalling an entry for our portfolio. We have seen strong follow through since its positive earnings release and it is now testing the prior highs from early May. I imagine you are wondering why we are not already in this stock due to our noticing the potential Double Bottom pattern and several of the bullish indicators we follow signalling an entry. What I try to do is enter into positive momentum situations with a very high probability of success. Since its magnificent decline, AAPL has never made a higher swing high on any rally attempt; it persistently has made lower lows following the lower highs. This is the definition of a down trend.

What I have been commenting on and watching lately are the signals that begin to build a case for entering a position. The ultimate determining factor, after signals indicate bullish activity, price must confirm that bullish bias. My signals include a Relative Strength outperformance or breakout vs. SP500, a rising 20 WMA with price above it, and finally an uptrending stock confirmed by higher highs.  

AAPL is within $3 of making a higher high. We have seen a RS breakout vs the SP500, price has also retaken a newly positive sloping 20 WMA. All it needs to do now is breakout and close above $466, that will be our entry signal and confirmation of a new uptrend.


CMI

Cummins is amazingly close to an entry for us after this week's trading. They reported a positive quarterly result this week and the stock has closed above range resistance. This week also saw the 20 WMA roll into positive trend and RS broke above a short-term downtrend line. Arguably we could have entered here into the close this week also. The one thing holding me back is the longer-term downtrend resistance on the RS chart. It is possible that this becomes some sort of bull trap as it just barely poked through the upper range. Any positive action this coming week will likely trigger that breakout and add a follow through confirmation of this week's strength. That is what we will be watching for. With price still in the upper range of a massive sideways channel, it will take some time for the full duration of this breakout to fulfill...We can have some patience here.


XLB (Materials)

Materials are set up for a big move very soon. This coiling pattern has been forming for over 2 years and we are now approaching the apex; something will have to give shortly. The RS downtrend is also nearing a possible breakout. Price is above a rising 20 WMA, so if we can see RS take out the downtrend while price can close above the $42 level, we will have our entry signal. Just an FYI, a breakout in XLB would be seen as a big positive for an increased rally by the major averages. Materials have lagged for years, if they could take the reins and lead, we could be in store for some solid returns.


As it should be apparent now, we are in a very favorable market to be long stocks. What few stocks on our list we don't own, nearly all of them are as close to buy signals as we can get. It may seem crazy to be adding new holdings at these levels, but I follow price and my signals. When I get my entry, I take it. It may be wrong sometimes, but I know quickly when it is and keep my losses small. Once you have a system in place that is successful, you learn to trust the signal instead of all the noise surrounding the markets and the economy. Really the only reason to be a seller of stocks here is that they have gone up a lot. But that holds no sort of empirical evidence, it is an emotional reaction to fear and greed. The market is a master of triggering your most vulnerable emotional responses at exactly the wrong times. It is for that reason that we have rules in place to override our emotional swings and keep us on the correct side of the market.