Last week’s more than 4% rally in the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) quickly brought back the animal spirits of traders as bullish commentary as measured by my proprietary reading increased all week. From where I sit however it looks increasingly likely that stocks may only bounce to lower highs for the time being.
In last week’s opening missive from Feb. 12 I offered that a near-term trading bounce may be ready; “…after a 12% corrective period the S&P 500 SPY ETF has reached a technical confluence zone that allows traders and active investors to place bullish trades against last Friday’s lows near $253. If these levels hold, then a re-test higher of the 50-day simple moving average near $270 could be a next upside target.”
Low and behold, by last Thursday the $270 mark on the SPY ETF was matched and even surpassed.
With yields on the 10-year U.S. Treasury Note climbing toward 3% and overbought readings on the weekly chart for stocks still present, I am in the camp that for the coming weeks/months the S&P 500 won’t be revisiting its January highs and that another downside press may be in the cards.
Today’s Stock Charts
Moving averages legend: blue – 8 day, yellow – 21 day
On the daily chart, note that the SPY ETF by end of last week rallied and thus far stalled at a technical confluence area made up of three things — 1. the black former support line (now resistance?), 2. the yellow 21-day simple moving average and 3. a 61.80% Fibonacci retracement of the entire sell-off from the late January highs down to the Feb. 9 lows.
While anything is possible, I now favor stocks to pause around current levels for a while with the possibility of another leg lower.
From an asset allocation perspective to me that calls for reducing my long exposure in the portfolio for near to intermediate term durations.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
With stocks potentially capped for the nearer-term time frames, I want to look for buying opportunities in utility stocks.
The multiyear weekly chart of the utility sector as represented by the Utilities SPDR (ETF) (NYSEARCA:XLU) shows that two weeks ago the lower end of the longer-standing up-trend was finally reached. Last week the XLU ETF bounced, which now gives active investors and traders a well-defined support area around $48 to trade against on the long side.
One way to take advantage of this current oversold signal in the XLU ETF is by applying an options income strategy. To find out more about this high-probability income strategy, join me for a special free webinar on Tuesday for InvestorPlace readers. Register here.
In summary, the higher-volatility environment we entered in late January is likely to stay for a while and while I do think stocks could ultimately see fresh highs again, I am a better seller of last week’s bounce than apt to chase stocks higher after a six day rally.
Check out Serge’s Trade of the Day for Feb. 20.
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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