On Thursday, stocks drifted lower, but the U. S. markets generally ignored an announcement of inaction by the European Central Bank.
The S&P 500 retained its two-month daily trading range of less than 1%, falling just 0.2%. The slight fall occurred despite the technology sector’s drag on the index, and that was due to a lukewarm reception of Apple Inc.‘s (NASDAQ:AAPL) introduction of the iPhone 7. AAPL fell 2.6%, and Hewlett Packard Enterprise Co (NYSE:HPE) lost 3.2% after announcing a spinoff and merger of most of its software operations to Micro Focus International, a U.K. firm.
Crude oil jumped 4.7%, its biggest advance in over four months. The increase to $47.62 per barrel (October) was the result of a U.S. Energy Information Administration’s report that showed crude-oil stockpiles falling, but the fall may have been due to delays in shipping because of rough weather conditions.
Biotechnology stocks showed good relative strength, continuing their recovery from a six-month decline. The exchange-traded fund iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) rose 0.7%. Eli Lilly and Co (NYSE:LLY) led the group with an advance of 1.7% following an upgrade to “overweight” by JP Morgan.
On Thursday’s close, the Dow Jones Industrial Average fell 46 points at 18,480, the S&P 500 lost 5 at 2,181, the Nasdaq fell 24 points to close at 5,259 and the Russell 2000 closed at 1,258, off 3 points. The NYSE’s primary exchange traded 837 million shares with total volume of 3.6 billion shares, and the Nasdaq crossed 1.8 billion shares. On the Big Board, decliners outpaced advancers by 1.2-to-1, and Nasdaq was almost break-even. On the NYSE blocks increased to 5,407 vs. 4,691 on Wednesday.
Today’s chart of the S&P 500 shows a defined breakout from a head-and-shoulders bottom with a minimum target of 2,370. The target is derived by subtracting the closing February low of 1,830 from the approximate neckline at 2,100 = 270 points. The 270 points are then added to the neck line at 2,100, which results in a target of 2,370, which is 8.7% higher than yesterday’s close at 2,181.
Conclusion: The head-and-shoulders (SHS) pattern appears on every current major index. It is traditionally assumed to be accurate about 80% of the time, making it one of the most reliable formations drawn by technicians.
This SHS bottom’s volume on the breakout was high, but the follow-through was weak. And volume has been, at best, average after the neck line’s penetration. However, the public has not been participating in this bull market, and this is contrarian proof of the validity of the formation.
The target of 2,370 is only 8.7% higher, as noted above, but stocks that experience price-to-earnings ratio expansion could jump 15% to 20% or more. The outlook is bullish; therefore, buy into stocks that are down due to profit-taking and sectors, like the airlines, which haven’t fully participated in the advance. Group rotation (see yesterday’s comments) is your friend and so use it to go ride the bull.
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.