Will the rally continue?

If you follow this blog with any regularity, you know that I advised in early July that markets may rally -here is the blog:  www.smartbounce.ca/?p=1304.  I made this statement despite the bearish naysayers at the time. My belief remains as it did in early July. That is, the evidence continues to exhibit an uptrend in both the short and intermediate terms, and will remain so until the respective trend lines and support levels are broken. I believe that the S&P will ultimately approach 1500 or so before the next bear leg evolves – please see last week’s blog for more commentary on my bearish outlook for 2013.

There are a few factors that may throw a monkey wrench into my short termed bullish prognostication. I’d like to acknowledge them here. This will allow you to remain watchful for possible signals that will spoil the current party on wall street. Any one of these factors doesn’t necessarily spell disaster for the markets, but they certainly could be a sign of a change coming.

My first factor that bears watching is the European stock market. I’ve chosen the Dow  Jones Euro 50 index to act as a proxy for the broader European market.  The Euro 50 provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries. As seen on the chart below, the Euro 50 is meeting resistance at its 200 day MA (red line). It’s failed to crack this MA in the past. Since the current rally in North America has been based on a few optimistic comments from European officials, it makes sense that their markets will influence ours. A decline of the Euro 50 from current levels may influence a pullback on our markets. Conversely, a breakout through the 200 day MA may add fuel to our current fire.

The next thing that I am keeping my eye on is commodities. Energy and gold are both attempting to break out of consolidation patterns. I mentioned in my blog 2 weeks ago that I bought gold when it touched just above 1550. I will likely add more if it manages to stay above 1620 for a few more days. This would indicate a bullish breakout from the large right angled triangle, as discussed 2 weeks ago at  www.smartbounce.ca/?p=1314

 My radar is focused on gold as it toys with staying above the 1620 level. Being that gold has had a fairly high correlation to stock price action over the past few years-  the direction of gold bears watching. 

Crude oil looks to have broken out of a small head and shoulders bottom formation. Its neckline at $88 was broken, and first resistance was unsuccessfully tested at $92. Oil’s importance as an economic health indicator adds influence to the stock markets direction. If oil can crack $92, look for $102 and a continuation of the current uptrend.