This Chart Could Signal Whether the Pullback Is Really Over

All major U.S. indices finished more than 2% higher last week, essentially recouping their losses from a week earlier. Last week’s rebound from the underlying support levels that I discussed in the April 14 Market Outlook was led by the S&P 500, which rose 2.7%. Despite this rebound, however, all other major indices are still in negative territory for the year.

#-ad_banner-#From a sector standpoint, energy led last week, up 4.9% and fueled by an aggressive influx of investor assets, according to my own metric. I first discussed unusually aggressive investor asset flows moving into energy in the March 31 Market Outlook, and the sector has since outperformed the S&P 500 by about 5%.

Is the U.S. Stock Market Pullback Over?
In last week’s report, I pointed out that the recent decline in the Dow Jones Industrial Average had positioned it right on top of major support at 16,014, and said, “I would expect at least some near-term dip buying to emerge as investors have been rewarded many times over the past year for buying sharp declines into support levels like this one.” The Dow actually traded as low as 16,028 on April 14, before spiking 432 points, or 2.7%, into Thursday’s highs.

I also suggested that readers consider covering short positions in the Nasdaq 100, as it had already declined by 6% since we first discussed a bearish chart pattern in the index in the March 24 Market Outlook. It traded as low as 3,414 on April 15, before rebounding as expected — by 137 points, or 4% — into Thursday’s highs. The sharp rebound in this market-leading index sets up an important near-term decision point this week.

The chart below highlights an important band of overhead resistance from 3,575 to 3,626, which represents the 50% and 61.8% Fibonacci retracements of the March 7-April 15 decline, and its 50-day moving average. This resistance area, situated 1%-3% above Thursday’s close, is where last week’s rebound should fail if it was just a minor rebound within an uncompleted decline.

Conversely, a significant and sustained rise above the 3,575 to 3,626 area would indicate that the Nasdaq 100’s larger 2013 advance has resumed, and would clear the way for more near-term strength. 

However, even though the bigger picture view for the U.S. stock market and broader economy is overall positive into 2015, investors are warned against becoming too complacent as a significant and potentially nasty corrective decline is likely between now and then.

Savvy traders will want to prepare themselves for such an event. While going to cash now will cause them to miss out on the near-term gains that are likely, and taking large short positions could be costly, there is another option. Many of our readers utilize an income strategy that not only pays them more in times of market declines, but can also ensure they act to scoop up bargains when others are panicking. If you’re not familiar with the benefits of selling puts or our Income Trader service yet, I suggest you learn more about the strategy by following this link.

Gold Needs Positive Asset Flows to Resume Its 2014 Advance

Last week, I said SPDR Gold Shares (NYSE: GLD) had recently rebounded from major support at its 200-day moving average (major trend proxy) and that this established an ideal environment for its next leg higher to begin — if gold prices were indeed in the midst of an emerging major bull market.

The lower panel of our next chart shows that this rebound stalled last week, as the ETF slumped back into its 200-day moving average, currently situated at $125.35. The upper panel of the chart shows why this happened.

The blue line in the upper panel plots the daily total assets invested in GLD, along with its 21-day (monthly) moving average. The arrows in the upper panel show that the Jan. 17 asset expansion above the monthly moving average fueled GLD’s rise into the March 14 highs, and that the contraction in assets since then triggered the ETF’s early April decline back to the 200-day moving average. Most recently, the assets’ inability to expand back above their monthly moving average in mid-April resulted in last week’s poor performance.

It would take a rise from at or near the 200-day moving average, accompanied by an expansion in assets back above their monthly moving average, to indicate that what appears to be an emerging new bullish trend in GLD has resumed and is sustainable.

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This Chart Could Signal Whether the Pullback is Really Over