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These 'Magnetic' Levels Could Mean Choppy Waters Ahead

The major benchmarks are dancing around round-number and year-to-date breakeven levels

by 4/5/2014 9:00:00 AM
Stocks quoted in this article:

Stocks notched their fifth straight quarterly win on Monday, and the Dow Jones Industrial Average and S&P 500 Index tagged record intraday highs in the subsequent sessions. However, the same can't be said for their tech-rich counterpart, the Nasdaq Composite, which logged its worst session in two months on Friday, just hours after a lackluster jobs report hit the Street. Heading into this week, Todd Salamone outlines some levels to watch ahead of the unofficial start to earnings season, while Rocky White highlights some under-the-radar stocks to watch.

  • The growing significance of year-to-date breakeven levels.
  • Encouraging sentiment signs ahead of earnings.
  • The best and worst sectors, from a contrarian perspective.

Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.

Notes from the Trading Desk: Round Numbers and Year-to-Date Levels in Play
By Todd Salamone, Senior VP of Research

"... round-number century levels continue to be speed bumps, with the RUT in particular having difficulty mounting a sustained move above 1,200 (roughly triple its 2009 low) ... The MID made a new all-time high in Friday's session, but 1,400 lingers just above, representing double its corrective lows in July 2006 and the summer of 2010 ... the Wilshire 5000 Total Market Index (W5000 - 20,007.07) has a huge challenge of its own, as it trades in a choppy manner above and below the key 20,000 millennium mark ... the short-term environment could remain choppy in the days ahead, as major benchmarks find support at breakeven levels on pullbacks, but do battle with overhead round-number resistance levels. For traders, this means you should either shorten or lengthen your time frames."
-Monday Morning Outlook, March 22, 2014

"Round numbers in play - $SPX 1,900 $MID 1,400 - can DJIA finally close above YTD breakeven by day's end?"

"Wilshire 5000's 20k level still a magnet - has touched this millennium mark 15 of 26 trading days since Feb. 28th #Trading Range"

-@ToddSalamone on Twitter, April 4, 2014

"More volatility could come from lower-than-expected first quarter earnings reports, out in April and May. Ablin notes analyst consensus first-quarter earnings-per-share growth projections for S&P 500 companies have dropped to 1% to 2% from 6% to 7% as the year began. The severe winter weather that gripped much of the U.S. in January and February may yet be seen again in many first-quarter reports."
-Barron's, March 29, 2014

Despite the S&P 500 Index (SPX - 1,865.09) achieving a new all-time closing high on Thursday, moving above its March highs in the 1,885 area, the index finds itself back in its range and below the 1,885 area once again, following Friday's jobs data. The action in the SPX follows what we have seen with respect to other benchmarks in previous weeks, which rallied up to round-century marks, only to get turned away. Depending on the week, at least one of several equity benchmarks that we track has been influenced by year-to-date breakeven levels acting as support or resistance. Or, a round-number century or millennium mark will come into play, either as resistance or a "magnet."

Last week, for example, the SPX found support in its 2014 year-to-date breakeven area, but once it took a whiff of the round-number 1,900 area early Friday morning, there was nothing left in the gas tank (Friday's intraday high was 1,897.28).

Meanwhile, the popular Dow Jones Industrial Average (DJIA - 16,412.71) found support in the vicinity of the round 16,000 level in March. This week, on an intraday basis, the Dow traded above its Dec. 31, 2013 close of 16,576.66 on three consecutive days. But on all three of those days, the average closed below 16,576.66. In fact, the Dow has not experienced a close above its year-to-date breakeven level in 2014.

Dow Jones Industrial Average (DJIA) -- horizontal line marks year-to-date breakeven -- Three consecutive intraday moves above 2013 close, but three closes below it
30-Minute Chart of Dow since February 2014 with YTD Breakeven

Likewise, the S&P MidCap 400 Index (MID - 1,367.11) touched an all-time high in Friday's trading, but unfortunately this high (1,398.91) was just shy of the 1,400 century mark, before the sellers emerged fast and furious. We've discussed 1,400 as a potential resistance area in prior reports, as well as 1,200 on the Russell 2000 Index (RUT - 1,153.38), which hasn't made a serious run at this level since the early and mid-March failures.

With the SPX chopping between support in the 1,840-1,850 area and now potentially bound by overhead resistance at 1,900, the battle between bulls and bears rages on, witnessed by the action in the Wilshire 5000 Total Market Index (W5000 - 19,877.60) the past several weeks. This index touched the round 20,000 millennium mark on Feb. 28 for the first time ever. Since the end of February, it has been engaged in a brutal trading range, with 20,000 being touched on 15 of the past 26 trading days. Bulls and bears hope this consolidation is resolved soon, but with other major benchmarks flirting with key support and resistance areas, a breakout or breakdown could be far into the future, unfortunately.

Wilshire 5000 -- 20K Magnet
W5000 since February 2014

Next week is the unofficial start of earnings season. The good news for bulls is that earnings expectations drifted lower throughout the quarter. Nevertheless, the SPX held its own, from a bigger-picture standpoint. Bulls might be encouraged by the fact that there has not been a serious breakdown from a technical perspective, and the bar that companies must hurdle during earnings season is lower than the bar that was set when we entered 2014. In fact, the shorts may have built up some bearish bets in anticipation that earnings will be weaker than initially expected. Short interest on SPX component stocks, after all, is up 5% since early January and near two-year highs, per the graph immediately below.

S&P 500 Index (SPX) component short interest continues to rise amid SPX reaching new heights
SPX component short interest since January 2011

Alcoa Inc (NYSE:AA), which reports Tuesday evening, kicks off the earnings season. The shorts, however, do not appear to be bracing for a bad report, with short interest down 34% since early February.

In conclusion, the short-term trajectory could remain choppy, so trading opportunities should be actively sought on both the bull and bear side. Our longer-term view remains bullish.

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