Week-In-Review: Big Breakout Coming To Wall Street

1 JbosStocks Breakout Of Bullish Head and Shoulders Pattern

Stocks rallied nicely last week and are once again flirting with major resistance (record highs) after the government reported a stronger than expected jobs report. The bullish fundamental catalyst is that Brexit means more easy money from global central banks and (for now) that is bullish for stocks. U.S. employers added 287,000 new jobs in June, easily beating estimates for 180,000. The major indices have now erased the entire Brexit sell-off which illustrates how the strong underlying bid is in the market. The major indices broke above the neckline of a short head and shoulders continuation pattern. Since the Feb 11 low, every pullback in the major indices has been short in both size (small percent decline) and scope (short in duration). That’s healthy action as the major indices refuse to budge on the downside. Now, some are saying the central banks are in there directly buying stocks (and we do not disagree) but we don’t care why the market is going up or down, we only care about what the market is doing. Two days after the Brexit sell off, Mario Draghi (European Central Bank President) said global central banks need to do more and that triggered a huge wave of buying from investors. Two days later, Mr. Carney, the head of the Bank of England, came out and said the Bank of England will provide more easy money which was a confirmation that the easy money party is here to stay. We also want to note that the market is now back near resistance and every time the market has traded at these levels over the past year and change, we have seen sellers show up and send stocks lower. Eventually, the market will breakout (and close) of range (above resistance 2134) or below support 1810) but until then, we are still range-bound. The fact that we continue to “test” resistance suggests it is only a matter of time until the market breaks out and begins a new leg higher.

Monday-Wednesday’s Action:

U.S. stocks were closed on Monday in observance of independence day. Overseas markets fell as fresh concern spread regrading Brexit. On Monday, the European Central Bank opened the door to state aid for euro zone banks. Italy was back in focus when they entered into to talks with the European Commission to recapitalize their banks with public money. On Tuesday, stocks sold off after the British Pound broke below last week’s low and continued to drag other markets lower. Shares of European banks fell hard as investors were worried about their ability to stay solvent in a post Brexit world. In other news, Bond yields continued to plunge across the world.

Stocks opened lower but turned higher after the bulls showed up and defended the 50 DMA line for the major indices. The ISM non-manufacturing PMI rose to 56.5 last month versus 52.9 in May. Markit’s U.S. services PMI edged higher to 51.4 in June, up fractionally from 51.3 in May. At 2pm EST, the Fed released the minutes of its latest meeting which showed Fed officials are going to hold off until the economy improves.

Thursday & Friday’s Action:

Stocks were relatively quiet on Thursday as investors waited for Friday’s always fun jobs report. Before the open, ADP, the country’s largest private payrolls company, said U.S. employers added  172,000 new jobs in June, beating estimates for 150,000. A separate report showed that weekly jobless claims slid by 16,000 to 254,000 last week, beating estimates for 269,000. Stocks rallied nicely on Friday after the government said U.S. employers added 287,000 new jobs, easily beating estimates for 180,000. 

Market Outlook: Stocks Flirt With Resistance

The market is once again flirting with stubborn resistance (recent highs) but the action remain strong. Economic and earnings data remain less than stellar which could mean more easy money from global central banks. As always, keep your losses small and never argue with the tape. 

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