Sunday, January 6, 2013

Stock Market Outlook for Week Ahead and 12 Potential Setups

2013 has certainly started out bullishly on Wall Street, as the market put in two out of three strong sessions and many individual stocks are acting well.  Does the market continue higher this week or is a pullback in the cards?  Let's look at the indexes first.

The Nasdaq is lagging the S&P and Russell a bit so far but it is also the most technically appealing index because it has had a little rest and is forming a tiny bull flag here.  I wish the other indexes did the same.

Both the Russell and S&P are indeed extended here, with the Russell leading all indexes.   Both of these could use some rest to allow the nine day EMA to catch up, but if you look back at the beginning of 2012, you'll be reminded that pullbacks don't HAVE to come.  Sometimes they can occur intraday and markets can just continue to move higher, albeit in a slower manner.   That's possible here. 

Russell 2000
S&P 500

 Two indicators I use from Worden are showing two different things.  The McClellan Oscillator (T2106) is still under 200 and is nowhere near being considered extreme from an overbought perspective.   However, the T2108 (which measure % of stocks above 40 day MA) is at levels where we have recently seen either sideways action (September 14, 2012) or a sharper pullback (July 5, 2012).  That indicator is flashing more of warning over the short-term, but if you look back at January/February of last year, you'll notice it got over 80 and stayed there while the market just kept chugging along.  It's possible we see the same thing here.

Two Overbought Indicators from Worden

My overall market score is bullish but with the overbought indicators flashing some warning signs, I am still a little cautious.   I am holding three long positions right now and my basic outlook is to take setups on the long side as they trigger, with the realization that reversals are always possible at the overbought levels the markets are at currently.  Ideally, the market would put in a day or two of rest and slow trade early this week, but it feels like I've said that a ton over the past year and it never seems to happen.  The market either just keeps going up or takes a dump.   Maybe this time will be different. 

Here are twelve charts for the week ahead.   You may notice that there are several biotech stocks in this list, and if you have followed my posts for any period of time, you probably know that I have said I stay away from biotechs in general.  I have changed a bit in that respect - I don't like holding them long at all and usually hold them no longer than a few days due to ever-present headline risk, but I am seeing so many recently that I just can't ignore them. 

All Charts from TC2000, Courtesy of Worden Brothers, Inc.

Good luck for the week ahead.  

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