While staying cautious, traders need to remember that there is nothing more bullish than rising prices.
New Highs Are Required for More New Highs
When prices are trending higher, they can repeatedly reach new all-time highs. Higher highs are, in fact, the definition of an uptrend. This is a reason for bullishness, and it describes the price action of the major market indexes over the past month.
SPDR S&P 500 (SPY) added to its gains for the year last week, closing 1.98% higher. The S&P 500 closed over 1,600 for the first time.
In 2012, the companies in the index earned $96.82, according to Standard & Poor's. Based on trailing earnings, the index is trading at a price-to-earnings (P/E) ratio of about 16.7. This in not cheap, but it is only a little above average. Based on estimated earnings for 2013 of $110.53, the index has a P/E ratio of about 14.6, a little below average.
Fundamentally, new highs in the S&P 500 are supported by the current level of earnings. Technically, the weekly chart is undeniably in an uptrend.
Last week's price action pushed SPY out of a small consolidation pattern. Momentum is strong and the trend could continue higher. The pattern suggests a short-term price target of $164 in the next four to six weeks.
Concerns about a decline now are largely based on the argument that prices are due for a correction. That could be true after stocks gained more than 13% since the beginning of the year. But that is not enough of a reason to sell.
Support is now at $155, and a break below that price should raise concerns. Until prices move decisively below support and break below $152, the uptrend is intact and traders should remain long.
Recommended Trade Setup:
-- Maintain long position in SPY
-- Maintain stop-loss at $152
-- Set short-term price target at $164
Gold May Have Reached Resistance
SPDR Gold Trust (GLD) gained 0.84% last week as it continues recovering from a double-digit drop in April. Now almost 9% above its April lows, GLD is at the resistance level formed when prices gapped down during a dramatic two-day sell-off.
GLD has been rallying for almost three weeks, but needs to close above $143.43 before the chart turns mildly bullish. A close above that level would lead to a price target of $155, the upper limit of the two-month range GLD traded in before dropping sharply. With the initial upside limited to about 8%, GLD is not particularly appealing.
Until GLD reverses its downtrend, PowerShares DB Gold Short ETN (DGZ), an inverse fund that goes up when gold prices fall, remains a buy. The fund fell 0.67% last week, but has significant upside potential. A longer-term price target of $14.59 is about 9.3% above Friday's closing price.
Recommended Trade Setup:
-- Buy DGZ on pullbacks below $13.20
-- Maintain stop-loss at $12.65
-- Maintain price target at $14.60
This Week's News
Traders may continue analyzing last week's news since there is no major economic news scheduled for this week. Earnings season is winding down with only a few major announcements left. A quiet week can be dangerous since traders have nothing new to confirm their optimism.