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SH @ the bell 5/3/12: SPX will break 1,422 if…

Having successfully broken out above their highs for the period that marked the consolidation pattern of various market internals recently, there’s some key things to watch moving forward. We want to see the top end of the recent ranges start acting as support in bullish cases, and resistance in the bearish cases. The bullish cases being sectors like financials, technology, and commodities like oil and copper. The bearish cases would be the VIX, the dollar, and Spain’s 10 year yields.

If we see our bullish indicators holding those ranges, it will be a real sign of strength and signal to us that the pullback from 1,422 to 1,357 was the pullback. For financials we’ll use XLF as our indicator. During the most recent pullback, XLF traded between $14.90-$15.50 so we’d like to see it now stay above the $15.30-$15.50 range. A breakout above $15.60 on strong volume should lead to a test of its 2012 high near $16.

Turning to technology, XLK hasn’t dipped below $29.60 since AAPL gapped $50 higher on an earnings beat. That’s even more encouraging considering AAPL has sold off nearly 5% since that same day. This tells AAPL’s poor performance isn’t dragging XLK lower, but simply holding it back. This creates a potential bullish catalyst in that if AAPL can regain its footing and get back above $600, that should only contribute to XLK’s strength. A sustained move above $30 would be good news for the bulls.

Oil and copper are a little more tricky because they actually fell below their March lows, something the broader indexes did not do. Therefore, it’s especially important that they find support near the top end of their recent ranges. For oil that means finding support in the $103-$104 range and for copper it means staying above the $3.70 area.

As for our bearish indicators, meaning if they start performing well we expect them to have bearish implications for the overall market, we’re seeing some mixed signals. The VIX for instance, continues to remain anchored in the 16-17 range, and won’t have much of an impact on the market at such levels. The dollar though is working on a higher low compared to its February low and if it can stay above the $78.50 level it may be poised to start uptrending. Then we have Spain’s 10 year yield, which remains a little to close to 6% for our liking. Stock market bulls are best served seeing weakness in these 3 spaces, while the bears need them to ratchet higher if they want to see the market suffer another pullback.

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