Stock markets are poised for an extension of the short term rally seen Friday, after the G20 stopped short of assigning the “manipulator” tag to Japan (in connection with its historic ¥7 trillion per month stimulus program announced last month).   This is an implied expression of support for major alterations in central bank policy, and opens the way for long term accommodative strategies designed to propel global economic growth.  This is a supportive environment for the benchmark indices, and the initial investor reaction was to send the S&P back through short term resistance levels (above 1552).

Even with the latest moves to the upside, last week was negative for the S&P as the index fell 2.1% (the worst weekly performance since November).  Negative stories were seen with GE, McDonald’s, IBM and Bank of America, all of which released earnings results that were lower than the consensus estimates.  In macro data, GDP growth rates in China dropped to 7.7%.  These numbers might sound strong from a US perspective but the result was lower than market estimates and is indicative of a strong downtrend that has been in place since 2010:

The combination of these factors were enough to spook investors and distract from the positive stories on the week (i.e. earnings from Google and Microsoft).  Looking ahead this week, we will have a heavy earnings calendar with 168 companies in the S&P 500 reporting results.  Thus far, 104 companies have made their results public and nearly 70% of those companies have performed better than expectations.  Monday’s headlines will likely center on the reports from Caterpillar, Netflix, and Texas Instruments.  Today’s macro data will be released just after the open, with New Home Sales expected to show that 5.01 million units sold (annualized rate), a slight increase from the 4.98 million units sold during the previous month.

Chart Perspective

Caterpillar (CAT):  

CAT is set for further declines once we see a break of historical support at 80.40.  The stock failed at significant long term Fib resistance at 100 (the 61.8% retracement of the decline from 114.30), and we are once again set for a test of the yearly lows at 77.10.  Advice here is to wait for a clean break (and hourly close below) 80.40 and then turn to a sell on rallies strategy.  First resistance comes in at 81.20, and this is an acceptable entry point for new sell positions.

NetFlix (NFLX):

NFLX is starting to look top heavy and vulnerable to breaks of support.  The first level to watch on the downside comes in at 159.50, which is a historical level.  A downside break here will be significant because it will turn the focus back onto the gap area seen just under 140.  If we see a downside violation of 140, expect the gap to be filled, with the next bear target coming in at 105. Risk to reward ratios clearly favor sells in NFLX at this stage.  In the reverse scenario, we will need to see an upside break of resistance at 182 to turn the focus back onto the yearly highs just below 200.