"Another week and another 6-1/2 year recovery high for the S&P 500," says technical analyst Melvin Pasternak -- who sees several reasons to remain bullish. Indeed, Friday's close put the index above 1500 for the first time since September 2000. So what's next?
The editor of Swing Trader believes the S&P is now within "easy striking distance" of the all-time closing high set March 14, 2000, at 1527.46 and the intraday peak of 1552.87 made that same day.
As the rally over the past week unfolded, he notes, stocks rose on both economic statistics and takeover activity. He points to last week's report from The Institute for Supply Management (ISM), which saw its Manufacturing Index increase from 50.9 in March to 54.7 in April.
He explains, "That number allayed fears the economy might be cooling too quickly." He adds, "Even Friday's tepid non-farm payrolls number of 88,000 did little to dishearten the bulls. Instead, traders put together all the week's statistics and saw an economy that was not too hot nor too cold."
This "Goldilocks scenario" of moderate economic growth and tepid increases in labor costs, he explains, means inflation should stay low. As a result, he says, "This increases the likelihood the Fed will leave interest rates unchanged or even lower them in the coming quarters."
Also boosting stocks, he notes, was continued talk of takeover activity, particularly in media companies, as News Corp. (NYSE: NWS) made overtures to Dow Jones (NYSE: DJ). He also points to an unknown suitor for Reuters (NASDAQ: RTRSY) and talk that Microsoft (NASDAQ: MSFT) intended to acquire Yahoo! (NASDAQ: YHOO).
Looking ahead, he notes, "The technical picture remains highly positive. The S&P closed above its upper weekly Bollinger band at 1498 for the third week in a row. A close above the band is a continuation signal. It indicates the rally, which began on March 14th at 1363.98 and has covered an incredible 140 points, still has further to go."
Adding power to the bullish argument is the notion that once broken, as level of technical resistance becomes technical support. To clarify, he notes that February's 1461.57 peak on the S&P was considered strong resistance -- or an area at which the market should have turned lower.
However he adds, "This resistance level was easily penetrated during the last upmove. Since 1461 was old resistance, on a retest it should become support."
Another way that technician's view the market is by drawing trendlines from one low to another. In this regard, he notes, "The intermediate trendline drawn from the March 14th 1363.98 bottom now intersects the chart at 1484. As long as that trendline holds, the direction for the S&P 500 is up."
He concludes, "Given the enormous increases in the past month, a short-term pullback could occur at any time. However, I suspect any near-term correction will be in the 2% to 4% range, last only a few trading days, and provide a buying opportunity."
For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.
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