Stock Market Trading Range Targets
More evidence of an improved economic environment was delivered last week when ECRI announced the growth rate of their leading economic indicator for the U.S. broke into positive territory delivering the highest weekly growth reading since August 10th, 2007. You can read their entire press release here.
Stocks ended the 2nd quarter of 2009 stuck in a trading range that marked most of the action in May and June. Overall trading has been constructive; marked by higher highs and higher lows. Still, volume has been down on price advances, possibly indicating uncertainty by traders where there should be strength.
Individual stock leadership (as measured by Investor's Business Daily indexes) improved as the rally from March progressed, a promising development.
As long as SPY (S&P500 ETF) can hold above $87.50, the market rally will likely remain intact. The NASDAQ 100 (QQQQ) has shown relative strength during the current rally and small caps (IWM), to a lesser degree.
The Consumer Discretionary group (XLY) has hit support at $22 three times since May. Failure to hold this level may signal the start of a correction.
Selling pressure that materialized in June caused little damage to stocks overall. End of quarter window dressing by fund managers and low summertime volumes created some noise in the market, but overall stocks appear fairly healthy. Earnings over the next several weeks may provide stocks the catalyst they need for a move higher or lower.
The rally from March lows has been impressive. There are few reasons to add new positions while stocks remain in this trading range, in my opinion. If stocks break out higher (above $95 for SPY) or fall below support it may be a good time to add new positions. In terms of downside targets, I would not expect March lows to be hit or broken. I do believe a market correction would be healthy given the magnitude of gains that were created over the last few months. If the S&P 500 breaks May support at 880, using a Fibonanci Retracement Tool from the March lows to the June highs would suggest a pullback to 845, followed by 813 and 781 depending on the selling intensity. If you are looking to enter new positions based on a pullback, watch the index action at these levels.
Enjoy your 4th of July holiday weekend!