S&P 500’s Pattern Should Give Traders Pause

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Stocks closed modestly higher Friday on low volume due to the long Memorial Day weekend. In fact, it was the second lowest volume day of the year.

Technology and biotech stocks led the way higher last week, with the Nasdaq logging its biggest weekly gain in three months, up 3.4%.

The Commerce Department revised its first-quarter GDP estimate up to 0.8% from 0.5%. While this was below expectations, it could provide the Federal Reserve with reason to raise interest rates soon. A recent survey of economists put the chances of a rate hike in June at 30% and July at 62%.

Financial stocks, which would benefit from a rate hike, gained 2.6% for the week.

The U.S. dollar rose Friday, and the WSJ Dollar Index, which tracks the greenback against a basket of 16 currencies, is up 3.3% for May. This could cause concern among multinational companies since U.S. manufactured goods would rise in real terms after a rate hike.

Oil fell 0.3% to $49.33 a barrel after briefly getting above $50 earlier in the week. Gold fell for the eighth consecutive day, down 0.3% at $1,216.70 an ounce. This is the lowest level in over three months.

At Friday’s close, the Dow Jones Industrial Average gained 45 points at 17,873, the S&P 500 rose 9 points to 2,099, the Nasdaq was up 32 points at 4,934, and the Russell 2000 gained 11 points at 1,150.

The NYSE Composite’s primary exchange traded 805 million shares with total volume of 3 billion. The Nasdaq crossed 1.5 billion shares. On the Big Board, advancers outpaced decliners by 2.1-to-1, and on the Nasdaq, advancers led by 2.2-to-1. Block trades increased to 4,338 from 4,215 on Thursday.

For the week, the Dow rose 2.1%, the S&P 500 gained 2.3%, and the Nasdaq and Russell 2000 each jumped 3.4%.

S&P 500 Chart
Click to Enlarge

Chart Key

On the chart of the S&P 500, note the “false breakdown” from the 2,040 line, followed by a trendline breakout and a new high on Friday.

This tape action has been highlighted by several respected technicians as proof of a pending breakout. But if we go back to December, we see breakdowns through the 2,040 line before and after Dec. 1. And the Dec. 1 close at the high of the day closely resembles Friday’s close.

Conclusion

The pre/post-Dec. 1 pattern with its false breakdown led to a false breakout. Volume was low until the pattern broke lower, and it was accomplished in the face of a rising 50-day moving average.

I was prepared to be more bullish until I studied these similarities. This pattern is replicated on the Dow and Nasdaq, so unless the market breaks to a new high, I remain neutral.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/daily-market-outlook-sp-500s-pattern-give-traders-pause/.

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