Market preview – trading plan, week of May 18, 2015

Weekly outlook – S&P500 cash index (SPX)

The S&P 500 cash index ($SPX) closed at 2122.73 last Friday — an all-time high close — up 6.63 points for net weekly gain of 0.3%

The SPX started the week with heavy losses, down 33 points on the first two days, but the selling ended on Wednesday. At the end it managed to close near the intraday high set in the last week of April, despite weak economic reports for retail sales, industrial production and consumer sentiment.

This week traders are watching to see if the index will give final confirmation that it is breaking out of the extended wedge pattern (a flat top with higher lows, see he daily chart below) by making new highs above the April high. The FOMC minutes this week could the catalyst, but the Fed Chair is speaking on Friday, and she may cool the market for a while.

Technical analysis

a) Long-term

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SPX weekly chart

The S&P 500 index returned to the April high area for closing Friday. This indicates that the big cap stocks are now leading the market higher and confirms that the bull uptrend is continuing.
Now we want to see the breakout confirmed by the index by closing above the range high around the 2125 level. If the market does break above the April high, it would contradict the old “sell in May and go away” adage that has been getting some attention from commentators.

If the index fails to break out, expect to hear more of that talk. The market is seasonal, and summer isn’t the good season for Bulls.

On the weekly chart the price action is bullish, and a further advance should be expected. The 2147.83-2136.50 area is likely to be the first profit taking zone, and any price advance may stall there for a time.

But if the broad market rallies strongly, the rally could continue into June. The full measurement of the target for a breakout from the wedge pattern is in the 2196-2200 zone.

The yearly pivot around 2055-45 is the key. As long as short-term pullback doesn’t break below that level, the final destination for this Bull market should be in the 2485 area, but that is a long-term target which we are not likely to reach this year.

b) Short-term

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SPX Daily Chart

Last week the SPX formed a small doji candle on Friday. This is not a reversal signal. It only indicates that price hadn’t made its decision on which way to go yet. Given the long tail on the bottom of the doji, we may see this index go higher again.

Based on the daily chart, the neckline of the wedge pattern is lying at the 2125 level. A move above 2125 will be bullish, and could push the SPX up to 2135-50 or higher. A failure to break it could lead the price to drop back above last week’s low.

Now the 2100-2090 zone has become the first major support. As long as SPX doesn’t go below 2090, the index will rally again.

We have the VIX options expiring on Tuesday. The VIX is the market volatility index and the expiration of the options usually results in larger-than-normal price swings, as traders try to manipulate the expiration price.

The index itself ($VIX) reached 12.38 last week, and when the index is that low we often see the market sell off. So Monday may be a down day; we’ll be watching the volume for the first clue.

Daily outlook – S&P500 mini-futures (ES)