Editor’s Note: Sam Collins will be on vacation through June 25. Filling in for him are two other top technical analysts, Chris Johnson and Jon Lewis.
The Sunday evening news that China would begin to let its yuan move more freely against the U.S. dollar kicked off a strong morning, but a gradual lack of support flowed away from the markets, and the benchmark indices surrendered their gains for the day and settled with losses.
While the yuan and dollar got most of the attention, weaker news in the technology sector and generally light trading volume contributed to the weakness as the market approached a technically significant 50% retracement Fibonacci level.
All-in-all, the technical health of the current short-term rally remains intact as the number of stocks crossing into short-term bullish trends remains strong, improving the breadth of the rally.
As of Monday, there were an additional 1,343 stocks that were transitioning from short-term bearish patterns to short-term bullish. Simply put, this information supports the short-term bullish scenario as more companies are now drawing buyers from the sidelines.
So what went wrong with the market on Monday?
Nothing. That’s right, nothing was really wrong with the market on Monday, from our perspective. A simple one- or two-day rest is healthy and should keep the markets from reaching overbought situations. We’re expecting the market to move higher through the week, with an increasing probability that we will see the S&P 500 (SPX) challenge the 1,150 mark.
The SPX fell to close the day at 1,113, within striking distance of support that we see as “must hold.” The must-hold level on the SPX is represented by the range identified in the chart below.
The SPX’s 200-day moving average is holding at the 1,110 with round-numbered support at the 1,100 mark. The zone drawn by these two technically significant levels should be considered support for the SPX. We will be adding bullish positions to our portfolio on strength in this support zone holding.
So where does this leave us? Expect the market to try to challenge the support that is lying just below Monday’s close.
The morning trade will be influenced the two reports that are due to be released: May existing home sales (consensus 6.1 million) and April FHFA housing price index (March was 0.3%). We’re expecting the housing numbers to be a little weaker than expected, but the Street’s expectations are low, meaning that any in-line results should fuel buying on the equities front.
We’ll also be watching the dollar traded against the yuan and euro for direction from the international markets.
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