Critical Week for Stock Market Ahead of March U.S. Employment Report

Stock-Markets / Stock Markets 2010
Mar 29, 2010 - 12:49 PM

By: Mike_Paulenoff

This week is going to be one of the most critical in a long time to the markets. The Government releases the employment report for March on Friday (a market holiday), expected to be the first positive data on additions to payrolls in months.

In addition, Greece is coming to the bond market with a sovereign bond auction Tuesday or Wednesday to pay its debt. Everybody will be watching that to see where yields are. If the auction goes well, that could be boost to the euro, causing a decline in the dollar, with implications, of course, to equities.

Further, China is on the cover of Business Week this week because, according to the article, the barriers to entry in China are much higher than before for U.S. companies. In Barron's, there's an interview with a fund manager who's convinced there's so much misallocation of capital by the Chinese government that it's a bubble waiting to happen, analogous to 1989 in Japan and 1929 in the U.S.

Elsewhere internationally, the Middle East is heating up, and the U.S.-Israel spat (with Netanyahu leaving Washington without even a joint statement with Obama) and the Iran nuclear issue create many uncertainties with implications for the dollar and gold.

Then there's the fallout from the healthcare plan in terms of the corporate reaction. So far you have Verizon, Caterpillar, Deere and AT&T all coming out with statements about gigantic losses or set-asides based on what to them is much too expensive healthcare plan.

And what about last week's lousy bond auctions? That's the first time we've seen three days of terrible bond sales by the U.S. Treasury. Is it a coincidence that the health plan went into law and buyers backed off of bonds, which forced yields higher?

All this points to how careful you have to be in equities. But as we've seen in last few months, it's a wall of worry that Wall Street is loving.

So this could be one of the most fun-filled, thrilling, potentially explosive, potentially implosive dangerous weeks we've experienced.

Key Markets to Watch:

Small caps are a market to watch. The iShares Russell 2000 ETF (IWM) is up 102% from a year ago, versus the S&P 500 Depository Receipts (SPY) up 76% and the Dow Diamonds (DIA) up 69%. Clearly, the small caps were the leader, which is surprising, because you would have expected to see smaller companies having a harder time navigating the tough economy in general and borrowing environment in particular.

However, March 25 was a key downside reversal day for the IWM, which made a new high for the entire year-long move but closed in negative territory, right near the low at 67.79. And below its 20 DMA. So a real distribution day.

Then Friday it closed basically unchanged as had other indices, but the IWM had made back about 50% from its low from Thursday only to close on the low again.

So small caps, which led on the way up, could conceivably lead on the way down.

Support is around 67 to 66.80 in the IWM, and below that is the 65-64.50 highs from Jan. I'd be watching the Russell as an indicator of the health of the market in the coming days. As long as the Russell holds its prior pullback low, at Mar 22 at 66.78, then I will consider it to be in relatively healthy condition and this is just a minor pullback. However, if it breaks the prior pullback low, then you have a technically significant breakdown, where it broke several days of lows in the 67.80-67.75 area. If that breaks, then I think we're going down to test lower levels towards 65 to 64 1/2.

Do I want to short it now? No, as this is a massive bull market. However, I do have a desire to buy a pullback.

Next we review the charts on the international markets, beginning with China, which is bearish, and then Japan (EWJ), which looks a lot stronger than China. One way to play the Japanese market is to short yen (buy the ultrashort Yen ETF, YCS) and go long dollars against the yen, which I think is the trade of 2010. We also like the euro/yen trade, with an oversold euro bound to outperform the yen, which is reviewed.

Gold, in terms of the way the dollar-euro is acting, has been relatively strong compared to the euro. The euro took off on Friday, reflecting confidence in a Greece solution, and gold took off too. So, I'm bullish gold because of its relationship with the euro, and because of all the issues I talked about at the opening - in particular, the deficits and debt of the U.S and rest of world, and the U.S.-Israel issue and implications for dealing with Iran. There are so many potential crises and landmines that I need more gold.

The SPDR Gold Shares (GLD) is still in coil -- it still has to get above 112 before it can take off -- but it's a relatively bullish coil. The Market Vectors Gold Miners ETF (GDX), on the other hand, doesn't look nearly as good. With these equity markets so overbought, going back to Oct 2008 level, it's just possible we've turned the corner and rolled over on a short-term basis. That creates a headwind for the gold mining stocks, but gold itself is a different story.

The dollar index chart (DXY) shows the dollar weakening with a modified pullback. So the dollar may have peaked, and perhaps equities have tired up here and could pull back 5-9 percent, a healthy pullback that should be bought. Gold looks like it's reversed. The iShares Silver (SLV) looks like it could really rocket. If the SLV can climb above 17.25-.35, I think it could be off to the races, along with gold

Individual Stocks to Watch:

MGM Mirage (MGM) is one of my favorite charts. It has a massive long-term basing pattern with a resistance band in the 13 area. If it can get over 12.90-13, it will start to look really intriguing. The pattern suggests to buy on a pullback, but have to be prepared to stay with it for a longer haul. Giant base slowly working its way to massive breakout probably towards 18-20.

Ford (F), on the other hand, is pretty much done. I'd be careful if I were long. I think it has a lid at 15 for now, which is still a significant move, but the risk is much greater than the upside, because if F pulls back, it could go to 12 to 11. I would wait for that.

Bristol-Myers (BMY) has had a move off a huge base pattern that could generate a continuation towards 30. However, I would be more inclined to buy it on a pullback to the 25-24 area, which looks like where it should hold.

Cliffs Natural Resources (CLF) looks like it's overbought and will start to huff and puff here real soon. It has passed the 50% Fibonacci recovery from its last high in Jul 2008 to its 2009 low. The 62% recovery is near 80. It closed at 71.25. So this is not the easy money part of the trade. The chart projects it could go there, but my sense is it will not, that it's consolidating for one more move up. The stock had a key downside reversal on Thurs, and Fri was an inside day, a continuation day. CLF should roll over to the 60 area, which would be a buying opportunity. If it takes out high at 73.38, then will go to next Fib level, which is 79.

Intel (INTC) had a reversal on Thurs, though not a key one. Probably the high was 22.75, so I'd look for a pullback to 21.80 to 21.50, or 21.25, which is where the trendline from Feb low cuts across the axis and where I'd be looking for the pullback to hold.

First Solar (FSLR), the biggest component of the TAN solar ETF, has a very interesting chart. The rounded base-like formation that has been established since early February is intriguing technically, within a very oversold condition. If it can get over 123-125, then I think it's on its way. If it breaks down, takes out prior pullback low in the 108-108 1/2, that would lead me to believe the TAN isn't going to do any better and I'd be bailing.

Apple (AAPL) has an amazing chart, having hit its low at 79 and change in Jan 09 and going up ever since. Someone raised the target to 250 on Fri, and I think there was even a 300 thrown in there. But to me the momentum is telling me that AAPL has to be taken cautiously. It probably will go higher but we are in nose bleed territory. From 230-35 should see a significant correction that could take it to 225-20 target zone for a buy. But if it really wants to kick some people out on the long side it will go down to 215-211.

Research in Motion (RIMM) has had an excellent move. It had its troubles after earnings in last Sept, and it's trying to fill the gap at 82-82 1/2. As long as the pullback low at 71 1/2 or so holds, it should fill the gap. This is a relatively strong-looking chart.

CONSOL Energy (CNX) had a secondary on Fri, but the chart shows that as a representative of the coal sector CNX doesn't look very good. It broke key support and closed at the lows on Fri at 42.50, and looks like to me it's going down to 40-38 area.

Peabody Energy (BTU), another coal stock, looks certainly better than CNX, but it looks tired and in a correction to test its major trendline from Mar 09, which comes in at 42 1/2. If it breaks could test its exponential 200-day at 40 1/2. Could be bought into weakness because trend remains strong and up.

Microsoft (MSFT) started to lift last week. It's not a growth stock any more, although it has doubled in the bull run. It's struggling now, and I'd be very cautious for a pullback here, as lots of resistance between 30.50 and 31.50. Support is 27 3/4 into the 26 1/4 area. Easy money was made and now it's sideways and frustrating for anyone who wants to buy it here.

Bank of America (BAC) has had a pretty incredible run and is trying to test its high from Cct at 18-18.65 and closed at 17.90 on Fri. Looks very healthy technically, but this is a serious resistance area, and if it holds people will get frustrated up here and will bail out of some of their positions in BAC, and the stock will go back into the 16 1/4 area, where we'll have to look at it for a buying opportunity.

Goldman Sachs (GS) doesn't look quite as good as BAC. My sense is it's had its run, is tired, couldn't get above its prior highs at 180-179 and has turned lower. It had a reversal day on Thurs and continued down on Fri, while the indices held up on Fri and closed unchanged. That's not a good sign for the near-term, and the stock is probably headed for deeper correction into the 165 area.

Wal-Mart (WMT) had a stair-step rally, breaking above key resistance in Nov at 55 and again in Jan at 55.20. But it looks tired, and momentum did not confirm the new highs in price, which is a problem. I'd be very careful, as it probably will come back through underneath 55 which would be a sign of technical weaknesss, into the 54 1/4-53.80, and may even a key level at 52 3/4. That had better hold, or the stock is in deep trouble.

Why would it be deep trouble? Maybe something to do with the economy, demand, the health care plan, all of the potential landmines discussed above.

By Mike Paulenoff