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No Clear Sell Signals, Buy on Pullbacks

With volume light, the market could easily turn back up


Some of our readers may be familiar with the satirical television comedy “That Was the Week That Was,” or “TW3,” that was a on the BBC in the early 60s. As I sat after surgery last week and could do little but watch the events in Iraq, I thought of this show in light of the terrible ironies of the situation. One event is particularly noteworthy — that Iran found the ISIS insurgents so extreme that they made an overture to join us in repelling them. Talk about “the enemy of my enemy is my friend.”

With the U.S./Mexico border an issue and Congress screaming, “We got out too early,” apparently the president could take no more and flew off to the West Coast to “plan” and “play” — golf that is.

And, oh yes, oil and the rally in stocks this year have been slapping some big hedge fund traders with huge losses since they have been losing on “wrong-way bets” in markets around the globe, according to The Wall Street Journal.

On Friday, Intel (INTC) rose 6.8% after boosting its financial estimates on stronger-than-expected PC demand.

The Producer Price Index (PPI) for final demand for May declined 0.2%, which was below expectations The University of Michigan Consumer Sentiment report for June also fell short of estimates, dropping to 81.2.

At Friday’s close, the Dow Jones Industrial Average was up 42 points to 16,776, the S&P 500 gained 6 points at 1,936, and the Nasdaq added 13 points at 4,311. The NYSE’s primary market traded 574 million shares with total volume of 2.6 billion shares, and the Nasdaq crossed 1.7 billion shares.

For the week, the Dow fell 0.9%, the S&P 500 lost 0.7%, and the Nasdaq was off 0.3%.

Dow Chart
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Chart Key

Despite the situation in Iraq, the Dow is holding firm on its 20-day moving average at 16,700 and even bounced from it. The overall chart formation is that of a cup-and-handle with the midpoint of the cup at approximately 16,175 and an intersecting support line, the 50-day moving average, at 16,548. The 200-day moving average provides extended support at 16,022. MACD has flashed a bearish signal.

RUT Chart
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The Russell 2000 small-cap index is flashing two bullish flags, a bullish “V” pattern and a bullish MACD. Support rests first at the 50-day moving average at 1,132, and then the 200-day moving average a 1,127. Resistance is at the twin tops of 1,181 and 1,180.

Conclusion: Despite the turn of events in Iraq, volume continues to be light and has even fallen further. This preserves the market’s ability to turn back up, and so until we see a clear sell signal, we remain on the “buy on pullbacks” plan.

With the Iraqi oil fields threatened, the Energy Select Sector SPDR ETF (XLE) blasted to a new high, and the Dow Jones Transportation Average closed under its first support line — the 20-day moving average at 8,047. I don’t suggest chasing either of these oil-influenced indices on the bear or bull side because of the high probability of a reversal.

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.

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