The indices all pressed higher last week as they continued their march towards the 2010 highs. There were some signs of fatigue, however, as the Nasdaq sprinted higher on Friday, the Dow Jones closed lower on the day. GOOG and techs soared as GE and banks sagged so we have a divergence which the market will have to sort out. What we do know is that the market is in an uptrend until it tells us otherwise.
One caution flag for the market is the Dollar Index ($DXY). You can see that we have stayed under a monthly downtrend line going back to 2004 but we have also successfully held an uptrend line from 2008 and are currently bouncing from that line. It is too soon to call a direction change in the dollar but a move higher would put pressure on the market.
Crude oil (USO) also has some downside potential at the moment. You can see on the daily chart that we have put in a daily 2x top under the 200 day ma, and under the daily pivot high from early August. Although we are at daily support, we could easily move down to the 20 day ma (around $34.50) or the lows of the range (around $32.50). A drop in crude would directly affect energy stocks, and probably pull down metals and other commodities as well. So take advantage of the market uptrend while it lasts, but keep an eye on some of these divergences that could give warning of a change.
If crude follows through on the double top mentioned above, one way to take advantage of it is the Ultra Short Crude ETF (SCO). A long entry could be taken over Friday’s high ($13.05) with a stop under Thursday’s low ($12.13) and targets of $13.90 and $15. For a more favorable reward/risk, look for an entry and stop on the 60min chart.
While most banks were getting hammered on Friday, State Street (STT) managed to hold its daily range and close up from Thursday. If banks get a bounce, STT should break out over its weekly resistance shown at the top of the chart. A long entry could be taken over Friday’s high ($40.51) with a stop under Friday’s low ($39.47) with a target of $41.90 and a second target of $43 to $44. If trading intraday, watch for resistance at the 200 day ma at $41.
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