Mixed Market

The SPY broke through the neckline of a head and shoulders top pattern last week. During the break, sentiment turned extremely bearish on both a long term and near term basis. We argued that sentiment would necessarily encourage contrarians to buy the weakness, which indeed, on Thursday and Friday, they did.

The SPY is now positioned for a test of the $137.50 area where it could potentially run into severe resistance.

Meanwhile, our scans show that the bull run in commodities is not slowing down. In fact, on Friday a large number of stocks in the metals and agricultural sectors caught a strong bid.

Oil has formed a pennant pattern, and while it looks to us as if there has been a bit of selling in the sector, it appears that a large battle is being fought in this area and the outcome of this battle is not yet known. If the pennant breaks higher, then oil could be headed for some sort of a blow off top. Otherwise, oil may be due for an orderly correction, which would set up another buying opportunity. Oil sector stocks are mixed; some set up very bullishly, while others are diverging negatively against the price of oil.

Summary: The SPY continues to suffer distribution, and while it is poised for a higher bounce at the beginning of the week, the likelihood that it will fail at $137.50 is reasonably high. As we have oft repeated, just because one part of the market is bearish does not mean that all stocks must go down. Indeed, there are a lot of bullish set ups out there for those who carefully pick and choose.