Now that the market has received the stimulus it’s been asking for, the question for traders and investors is whether or not the run up during the summer months will carry over to the rest of the year. As the market pushes higher, bulls face some stiff resistance levels to fight through.
In this week’s interview with Toni Turner of TrendStar Trading Group, we discuss the prospects of stocks moving higher, the potential for a near-term pullback, and whether or not Apple can breakthrough to $700.
EQ: On Friday, you noticed that the S&P 500 may be closing in on a “gravestone doji”. Can you describe this pattern and what it could mean for stocks?
Turner: A gravestone doji is a Japanese candlestick chart pattern. It can form at the top of a price upswing, and it consists of a single candle where once it opens it rises to an intraday high, but then moves all the way down to close at the opening prices. So this leaves a long shadow–some people call it a wick –on the top of the real body. The shadow tells us that bears are in control because although the bulls were able to push the price higher on an intraday basis, the bears took over and closed the stock down at or near the opening price, which also turned out to be the low of the day.
While Friday’s candle did not turn out to be a picture-perfect gravestone doji because it did not close on its low, it still had the long upper shadow at the top that indicates bears are there and waiting. Like all candle formations, we need the subsequent day’s price action to confirm it. So in this case, Monday’s price action for the S&P 500 confirms it by closing lower than the doji low, meaning that we could potentially see a pullback or consolidation this week.
EQ: Now that the Federal Reserve has finally unveiled QE3, do you expect the market to become more conservative, perhaps even start taking profits? Or do you think it gives investors the green light to reenter the market?
Turner: We’ve been in rally mode for months, and now news that each month the central bank will absorb mortgage securities worth about $40 billion a month until job growth picks up certainly infers that we have a safety net in place. Now, that money won’t go directly into stocks, however, it will free money to be used across the risk spectrum.
Technically speaking, the market looks a little euphoric. I don’t think anyone can deny that. The indices are trading at very high premiums to their major moving averages. What I’m guessing here is that the S&P 500 may be able to get to the 1500 range, but then the bands of resistance from the highs of 2000 and 2007 are in place. Those are big bands of supply, and whether or not the benchmark can muster the volume and enthusiasm to move through 1500 is anyone’s guess. That’s going to be a mighty feat because it did not happen in 2000 and it did not happen in 2007. So I suspect we have a little pullback here and perhaps a more substantial one later in maybe the first part of October.
EQ: Apple (AAPL) is threatening to break $700 but can’t seem to get over the hump for some reason. Do you see strong resistance at $700 or around that level?
Turner: Absolutely. Whole, round numbers are always resistance for everybody; even Apple. If you look at a monthly chart, Apple has shown resistance at $400 and $600, although it overcame them quickly. So we have to see if $700 causes profit-taking. Since moving above $400, Apple’s angle of ascent has steepened dramatically. Now, whether it’s a slow down here depends to a degree on how many portfolio managers still need to buy Apple before the year’s end for the purposes of window dressing. Currently, only about 64 percent of Apple is held by institutions, and I suspect any pullback is likely to be bought. So Apple may get little hitch in its giddy-up in the $700 zone, but I don’t know if Apple will stop there. Of course, if it does, it affects the whole market because it’s such a huge component of the Nasdaq 100 and substantially weighted in the S&P 500.
EQ: What are some of the sectors or groups that you’re watching for this week?
Turner: I am watching the PowerShares DB US Dollar Index Bullish (UUP). While I don’t know if I will actively trade it, I’m certainly watching it as an indicator. As we all know, this ETF represents the U.S. dollar versus a basket of other major currencies. The UUP is showing volume signs here of a possible shift or reversal back to the upside. It’s fallen dramatically and is very oversold, as one would imagine with so much more stimulus being given to the market by Mr. Bernanke and company. But as we all know, nothing in the market goes up or down forever and other countries are going to work to lower their currencies against ours. If the UUP begins to strengthen here, I could see our market losing some of its enthusiasm, so we’ll want to keep an eye on it.