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Can Strong Fundamentals Help Against Bearish Technicals for Stocks?

Buoyed by positive economic data and solid earnings numbers so far, stocks have managed to string together several sessions in the green. However, with one of the most historically volatile weeks

Buoyed by positive economic data and solid earnings numbers so far, stocks have managed to string together several sessions in the green. However, with one of the most historically volatile weeks for the market only reaching its halfway point, investors may be wise to brace for some near-term volatility. Expectations for third quarter earnings are as low as they have been in several years, and coupled with several other major economic and political variables, the market could be susceptible to the whims of jittery investors in need of a catalyst.

In this week’s interview with Toni Turner of TrendStar Trading Group, we discussed what stocks could potentially have in store from a very near-term technical and fundamental standpoint.

EQ: So last week, you noted that a breakdown below the S&P 500’s (SPY) 50-day moving average would mean a double top for the ETF. What is a double top and what would that mean for stocks and the ETF?

Turner: A double top is a top-reversal pattern that resembling something similar to a upper case “M” shape on a chart. It happens when the market is moving in an uptrend as it has been, and the index or stock that you’re tracking makes a new high and then pulls back, and then makes another new high within 4 percent of the prior high. So after it makes its second high and reverses back to the low middle pivot of the M formation, and closes below it, then that makes it a legal double top. When the top has formed, we can estimate or project the measured move that would happen next by measuring from the support line, which is the middle point of the M with a horizontal line drawn across, up to the prior high. Whatever that measurement is, we subtract it from the support line. The result is what we call the “measured move” and gives us an idea of the expected move down. It doesn’t necessarily mean it will happen, , but many times, the asset will fall to that point.

In this case, the S&P 500 made a slightly lower high on its second high on Oct. 5. So simply put, that tells us that investors are not willing to pay more right now for S&P 500 stocks. So the double top has formed but we haven’t had a close below the 50-day moving average yet, which is about 1429 on the S&P 500. That’s the key level to watch for because it’s the horizontal support line for the double top and the 50-day moving average. When two indicators converge, it makes it doubly important. If the S&P 500 closes below 1429 sometime this week, then the double top will have been formed and the measured move it could make—though certainly not all at one time—would take it down to 1391. Now, though, we’ve had two strong days higher, so perhaps the double top will not play out. At the moment, the bulls are in control.

EQ: This week seems to be a big one for stocks as we earnings really get underway and the market faces a full slate of data releases. How are you approaching it?

Turner: This week, we’ve already had the CPI, which gives us headline inflation. We also have Goldman Sachs (GS) reporting and the Presidential debate tonight. On Thursday, China issues its third quarter GDP, and Morgan Stanley (MS) reports. Also, Friday is options expiration day. So we have a whole bunch of numbers coming in for housing and manufacturing, and on top of that we have options expirations and some of the key Financials reporting.

So if you look back at previous year to this week, , it looks like a monkey on espresso took a crayon and drew back-to-back candles that are very disorderly. By back-to-back candles, I mean that stocks can trade up one day, then down the next, then up again, then down again, but it doesn’t actually go anywhere. I’ve been through this week before and the way I approach the week is to keep my mittens pretty much off the keyboard.

EQ: We’ve discussed that this period is going to be choppy for the markets. Could this week be the height of that choppiness?

Turner: I don’t know if this is the height of the choppiness of the market, but it certainly has all of the ingredients to make it so. The ups and downs of the market are very typical for this week of the year. So while people may want to jump in and day trade—and so far it’s been a great week to do so– those , it is not my favorite week to establish new positions that I intend to hold.

EQ: Apple’s (AAPL) decline has now crossed over to correction territory, surpassing 10 percent over the past month. Is this going to get worse before it gets better?

Turner: Right now Apple is sitting on a trendline that stretches from May all the way until right now, and it’s sitting on this trendline as of yesterday. If it falls below $629 or so then that trendline will have been penetrated. Of course, technically speaking, that’s not a good thing. In addition, analyst expectations for Q3 are down. Wall Street is looking for $8.91 earnings per share, which is down about 10 percent from last quarter and only a slight improvement from last year’s earnings.

Apple is one of the greatest companies in the world, and the legend of Apple is you buy it before the earnings announcement and you make $1 million when earnings come out. That particular paradigm has been broken. Were I going to invest in Apple for the long term, I would wait until after earnings on Oct. 25. There are too many question marks right now with the worries of maturing demand, newer models of products, its ability of making iPhones fast enough to meet demand, and earnings expectations being down. With that said, this may be the time for some, especially with the Oct 23 announcement for the probable new iPad mini coming out today. Personally, though, I would rather wait for true earnings to come out to see what happens. So I would say that for investors with an average risk profile, this might not be the best time.

EQ: What sectors or groups are you watching for this week?

Turner: The Health Care Select Sector SPDR (XLV) has pulled back, and then rebounded, and it still looks strong. We have 10,000 baby boomers a day retiring, and I really think Healthcare is the place to be over the next few years.. On Thursday, China will issue its third quarter GDP, and it’s estimated to slow to 7.3 percent. If China’s GDP numbers are healthy, then I’m keeping an eye on the iShares MSCI Brazil Index (EWZ) and the iShares MSCI Australia Index (EWA). Those are two countries that benefit because China imports commodities from them. Therefore, if China’s third quarter GDP is acceptable, I would watch these two ETFs to see if they start moving out of their current consolidation patterns.

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