Market Outlook: Stay alert for possible breakouts

With both stocks and commodities having traded in fairly confined ranges, the S&P 500 is now due for a healthy pullback. That’s the market outlook from Toronto-based Brian Hoffman, CPA, CA, and a member of the Canadian Society of Technical Analysts.

Over the past several months, both stocks and commodities have traded in ranges that have been fairly confined.

So, investors need to consider the potential for breakouts, either to the up- or to the downside.

Admittedly, European stocks have recently been in the news. But the attention seems misplaced, given the Continent’s anemic growth and deflationary markets. And that’s putting it mildly.

Moreover, the talk about valuation concerns with U.S. stocks almost makes them a contrarian play, although not entirely so.

Stock market outlook

Yes, the S&P 500 continues to hit all-time highs. But it’s certainly due for a healthy pullback — especially since the technical outlook is weakening, at least over the near term.

Of course, whether a correction worsens into a full-blown bear market is yet to be seen.

So, as always, watch for breaches of key support levels. They’ll foreshadow any deterioration in stock markets beyond a minor pullback.

The first level of key support for the S&P 500 is still 2,000 followed by 1,900 and then, by 1,820 and change. A breach of all three could see the index fall back to the 1,600-1,700 range.

Meanwhile, here in Canada, strength in the S&P/TSX Composite Index has also waned. That’s because the bounce higher from extremely oversold levels late last year now seems to have been played out.

The index is also boxed into a range that in April found resistance near 15,400, falling short of the all-time high above 15,600 that it hit last summer.

True, the S&P/TSX Composite has excellent support around 13,600. But there’s a very real possibility this will be tested later if the commodity and financial services sectors this year show any significant weakness. A breach of 13,600 could see the index tumble to 12,000 or even lower.

As a bellwether for Canadian stocks, consider the iShares CDN S&P/TSX Capped Financials Index Fund (TSX─XFN), an exchange-traded fund that tracks Canadian insurance companies and conglomerate banks.

Over the past six months the fund has ranged between $29 and $33 a unit. Meaningful moves above or below these prices could give the S&P/TSX Composite a jolt.

Commodity market outlook

In the interim, let’s look at the commodity sector.  After some big price gyrations over the past six months, commodities could see some key support levels tested during the summer.

Consider crude oil.  It’s bounced back from its March low of roughly US$42 a barrel.

But the technical outlook is now bearish, given that petroleum encountered some heavy resistance around US$60 in May. Indeed, if oil is to continue to climb upward, it will have to rise to at least US$66 a barrel.

But I expect oil to revisit its March low.  In fact, a breach of US$42 could send petroleum into a free fall — even down to US$30 a barrel.

Precious metals market outlook

And what about precious metals? Well, since moving above US$1,300 an ounce back in January, prices for gold bullion have since softened. But in order to get some oomph in its technical outlook, the metal needs to top US$1,430 an ounce.

Indeed, over the short term, prices for gold and silver bullion appear to be bearish. So both metals are likely to move lower over the summer months.

A breach of support for gold in the range of US$1,130-US$1,150 an ounce could presage its fall to US$1,000 or even lower.

Despite the washout that this would bring to both gold and silver miners, better days for these folks do lie ahead. But the metals could offer investors a rough ride over the short term until prices bounce back later this year. 

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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