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Can Market Build on Last Week's Reversal?

Scott Redler

US stock futures are set to kick off the week on a positive note, building on the upward momentum from late last week. The headlines over the weekends focused on weak China economic data, but Japan ripped 5% and US markets are following suit. S&P futures were a little off a bit last night but are now up 6-7 handles.

Last week the market reversed at a key technical inflection points: the 50-day moving average (which also coincided with support at a previous breakout level). We talked several times about that being an area to watch for a bounce, and the move played out according to plan.

The 50-day was a spot to cover some shorts if that is your game, and a spot to buy the dip if you were looking for a calculated entry into this 2013 bull market. If you blinked, you might have missed it, which is why we harp on preparation and make sure to keep you updated on technicals every single day.

On Thursday The S&P 500 ETF (SPY) broke below $161.13, made a low of $160.25 and then closed strong. Friday we had a gap and go to the upside after the solid jobs data and now here we are back at $165ish. This might be a decent resistance spot where we could pause.

In Thursday's Morning note I listed Wednesday's lows across the board in several ETFs, which were levels I was watchng for potential reversals. Now on day three of the bounce, the trading oscillator is back to neutral and many sectors are coming back up into some resistance. We could see a pause/a few days of digestion. On Day 1 of a bounce you can play broad indices and sector ETFs and get volatility, but when a move gets a few days old, you might have to work a little harder to identify relative strength.

In the Morning Call I will check the temperature of some of the key sectors.

If you haven't already, make sure to sign up for Scott Redler's free Morning Note. Here is a sample.

The Financial Sector ETF (XLF) saw big gains of almost 2% on Friday and closed above its 8-day moving average after seeing a Red Dog Reversal on Thursday. XLF held above its 50-day on the last pullback, which overall is positive for this 2013 leadership group. The banks were also leading the market up since April. The longer it stays above new support levels of $19.22-19.36, the higher probability we could see it take out 52-week highs at $44.70.

The Retail ETF (RTH) also managed to close back above its 8- and 21-day moving average on Friday after a few days basing above its 50-day, showing relative strength. Last Thursday's low of $51.16 could be the new floor to trade against. As long as it holds above this support level, the greater odds we could see new highs above $53.46.

The Industrials ETF (XLI) also saw a nice two-day bounce that took it back above the 8- and 21-day MAs. XLI broke above these key moving average and closed on highs on Friday, signaling some potential continuation this week. There is some resistance from prior pivot highs of $44.28-44.70.

The Transports ETF (IYT) dropped below its 50-day moving average with big losses on Wednesday, but quickly got back above this key moving average on Thursday and showed some relative strength on Friday with gains of 2.5%. It would now be healthy to see some consolidation above the 50-day at $111 to digest these big gains.

The Utilities ETF (XLU) was the laggard sector since May 1 as bond yields rose, but also saw a small rally after holding its 200-day moving average on Wednesday/Thursday. The ETF saw moderate gains of 0.61% on Friday and still looks relatively weak. The next challenge on its way up would be the 100-day at $38.41, then the 21-day at $38.70 after that.

Technology continues to provide opportunity.

Google (GOOG) has acted very well during this 2013 move. The market leader bounced on Thursday and then on Friday cleared its descending channel. GOOG could now see micro resistance around $890-892, but overall it looks very good

Amazon (AMZN) has been highlighted as one of the best patterns in tech recently as markets corrected. The set-up triggered on Friday through $272-275, and with some time it could take out $284.72, in my opinion.

Apple (AAPL) was weaker on Friday but reversed at its 50-day and closed well. Today the developers conference starts and the company is expected to unveil new operating systems, new laptops, and am Internet radio service, which could be the most important announcement of the event. Tim Cook speaks at 1:00pm ET. As far as the stock goes, if AAPL could get back above $450ish on volume it could help this struggling Inverted Head and Shoulders pattern look better.

Netflix's (NFLX) pattern is getting tighter, and now it needs to stay above $210ish to keep technical traders interested. There is an action area at $225-227 if it can rally through that level on big volume.

Yahoo! (YHOO) held the 21-day MA again and responded well. We have YHOO trade in the same pattern for most of 2013, and it once again looks good for new highs. New CEO Marissa Mayer is working wonders over there.

LinkedIn's (LNKD) pattern looks at bit broken on an intermediate-term basis, but it did have a nice three-day move off big support. Now let's see how it handles resistance at $172-177.

Facebook (FB) made a small two-day up move, but, needless to say, still has a ton to prove. If you bought it at $22.79ish, you could have room to ride this back to $24.60ish.

Microsoft (MSFT) still acts very well and is riding the 8-day.

Metals failed at key resistance around the same time markets rallied. Gold (GLD) got rejected by $137, and now the $130.50 level will be very important to watch if it gets there.

The 20+ Year Treasury Bond ETF (TLT) downside trade continues, while conversely the Inverse Bond ETF (TBT) might finally get and stay above $69.50-69.75ish.

*DISCLOSURES: Scott Redler is long AAPL, AMZN, YHOO, FB, BAC. Short SPY.