Stocks Aiming Higher, But Don’t Forget That Risk

On July 19 and 21, the key stock indices surged towards their respective multi-year highs. The key stock indices have shown some resilience after battling back from being down nearly 10% this year to the point where the S&P 500 is less than two percent from its multi-year high. The key stock indices are aiming higher, but I sense that it will not be an easy route to a breakout given the difficult resistance as stocks move towards the upper levels.

On the charts, the overall market is moving higher. About 63.31% of all U.S.-listed stocks are above their respective 50-day moving averages (MAs) versus 30.92% a month ago.

But I’m not convinced any strong upside move is sustainable and feel that the key stock indices could trade sideways for the summer months.

A key chart development for driving the rally was the upward break by the key stock indices at above their respective 50-day MAs. The S&P 500 broke below its 50-day MA on July 12 at 1,312, but has since rallied and could be heading higher.

On the S&P 500 chart, there is key support around 1,250. A break below would be bearish and see a potential move to below 1,200. I expect the support to hold. There is strong resistance at around 1,362. A strong break above could drive additional gains towards 1,400. On the chart, we continue to see a bullish golden cross with the 50-day MA above the 200-day MA.

The negative I see is the relatively light trading volume during the up days, with the exception of decent trading during the surge last Thursday. What you what to see is mass market participation in the market when stocks rise as a confirmation of common interest.

While the charts are slightly positive, they can also quickly reverse.

A plus for the bulls has been the strong earnings season early on that I had discussed in my previous commentary. Technology appears to be leading the charge.

I admit the strength in stocks has caught me by surprise, but now the outlook looks better and bullish on the charts if the gains can hold. At the same time, don’t forget the high debt risk in Europe, despite the resolution, and the debt ceiling debate in this country.

And there is also the matter of generating jobs to drive spending and economic renewal. Moreover, the housing sector continues to see declining prices driven by excess inventory, foreclosures, and the dreaded short sales where homes sell for less than the mortgage value.

I feel that the near-term upside could be limited by the market risk. The key is to watch the volume on upward moves to gauge interest in the market.

My investment advice would be to take some profits off the bigger winners, but otherwise ride the upside. You may also want some downside protection via put options.

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