Has the spring season sprung a change of fortunes for the stock market?
Since I last wrote to you two weeks ago, the major stock indexes have certainly performed well, moving higher, but still trading within the confines of the longer-term consolidation pattern.
While the daily chart patterns on some of the indexes are tough to forecast at the moment, the Dow Industrials and the S&P 500 appear to have given valid daily buy signals. If so, they should trace out at least a three-wave Elliott move to the upside.
The short-term stock market outlook
With all the major indexes closing comfortably above their 50-day moving averages last week, they appear to be headed higher – at least over the short-term.
That said, however, the sharp rally that we’ve seen over the past few weeks can’t last forever, and the market is due to pullback relatively soon. But the Dow and S&P 500 are at least still in Wave 1 of the expected three-wave (and maybe even five-wave) rally.
To illustrate this, take a look at the daily chart of the S&P 500 below…
Watching the waves
With the index closing at the highs of the week, I have a short-term price objective around the 853 level. But as I noted, the market is also overbought in the short-term and due for a pullback soon, so we should see the Wave 2 correction begin sometime this week.
Once the current rally runs out of steam, we could see a healthy pullback of 30% to 50%. But given that the indexes have acted bullishly, Wave 2 could take the form of a consolidation pattern. If so, these are usually shallower corrections of 23% to 30%.
To be considered a Wave 2 pullback, the S&P 500 would have to trade below the rally high for at least four full days. If not, and it makes new highs before a four-day pause, it would still be considered in the first wave.
Either way, the indexes are currently set up in “buy the dips” mode, rather than a “short the rallies.”
Onto some sector analysis…
Nano news
This week’s sector is one that garnered a lot of attention a few years ago, but has since dropped off the radar.
Nanotechnology is basically “the science of very small things,” since it deals with products and devices less than 100 nanometers in size. It’s already instrumental in technological fields such as computers and semiconductors, plus energy, manufacturing, and biotechnology.
Below is a chart of the PowerShares Lux Nanotech (NYSE: PXN) – an ETF that represents the Lux Nanotech Index. The fund invests about 80% of its assets into companies that specialise in nanotechnology.
However, because nanotech is an up-and-coming sector stock market-wise and can thus be very volatile, PXN is kind of a “hybrid stock,” investing in stronger, more well-established companies, too. This includes 3M (NYSE: MMM), General Electric (NYSE: GE), Intel (Nasdaq: INTC), IBM (NYSE: IBM), and Hewlett-Packard (NYSE: HPQ).
The stock went low enough to satisfy its downside target in March and although it’s lightly traded, it appears to have given a valid buy signal off the lows.
The minimum target on the daily chart is around $8.40, which is above the resistance level of $8.25, so it could easily go higher as long as the stock indexes cooperate.
Regardless, if PXN retreats and tests its 50-day moving average, which is currently around $6.70, it looks like a good short-term buy. I would use a couple of closes below $6.28 as a stop loss.
• This article was written by Jim Stanton for the
Smart Profits Report
and was first published on Monday 6 April