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Market Fireworks About to Fizzle

Investors should expect profit-taking in the early part of the week


Friday’s rally in stocks brought the winning streak up to five days; a trend that will be difficult to near impossible to continue at this pace much longer without some sort of a rest very soon.

Much of the help for stocks last week finally came from the sluggish financial sector. The Financial Select Sector SPDR (NYSE: XLF) not only broke out of near-term resistance near $15, but on the weekly chart also rallied hard following two doji candles. Candlestick analysis finds that doji candles, which happen when the open and close of the day or week are nearly the same price, often occur at telling turning points in the markets. How long this most recent upward trend will last is difficult to say, but follow-through buying should build on top of last week’s bullish market action; however, some consolidation/correction should first take place.

XLF Chart

The S&P 500’s completely vertical rally last week is apparent on the daily chart below. At 1,345, the S&P 500 will run into a resistance area from late May/early June. I would expect a correction of last week’s rally to take place near those levels, if not before. Furthermore, I would expect this correction to retrace anywhere from 38.2% to 61.8% of last week’s move before renewed buying power makes an appearance.

In terms of price levels, that would correspond to an area from 1,295 up to 1,312 as a potential support zone. As long as 1,290 holds, I would expect the next higher target near 1,357 to be reached as part of this swing up that started on June 27. At the same time, a daily break of 1,265 should lead this index to lower levels. 

SPX Chart

Friday’s June ISM Manufacturing Index came in a better than expected at 55.3 versus the 51.1 consensus, thereby adding more fuel to the rally that started overnight on Thursday. 

The iShares MSCI Germany Index Fund (NYSE: EWG) in the meantime worked itself back up to a resistance level from mid-May after making a lower low on June 27. Such action too is bullish for the near-term, and I expect a breach to the upside of the 27.2 level after some consolidation over the coming days. I point out this index as it is even more closely correlated to the situation in Greece and, as such, something we want to keep a close eye on going forward.

EWG Chart

This brings us to the metals, specifically gold. While the U.S. dollar traded down last week, gold futures decided to join and finished the week down around 1.2%. In other words, the typically inverse relationship between precious metals and the dollar decided to skip a beat last week, and allowed gold, silver and stocks to trade in tune as displayed in the chart below. Unless the inverse correlation between gold and the dollar is broken for good (very doubtful), we would expect that in order for gold to head higher, the dollar would continue its path downward.

Gold vs UUP Chart

Staying on the topic of gold, it is important to point out the blue uptrend line that previously served as resistance and now acts as support. A bounce from here would be the logical conclusion, and should the blue trendline break, we may have seen an intermediate-term top in gold.

Gold Futues Chart

Given last week’s fireworks in the stock market week, I see some profit-taking in the early part of this week, and as of Thursday, I would expect all eyes to turn toward Friday’s June jobs report.

All in all, and as discussed last week, given the sector rotation starting on June 16, whereby money first rotated into smaller sectors and finally last week into the important financial and energy sectors, I expect further upside in coming weeks. Aggressive investors might catch more upside in coming weeks, while for investors with mid- to longer-term investment horizons, this current rally might offer a better time to unload risk.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

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