The short-term trend for stocks changed with Wednesday’s gap and breakout. The medium-term and long-term trends were already up. This means that all three trends are up again and we could see a challenge to the March highs. While I hate to play the fundamental card, the fate of Wednesday’s breakout and the challenge to new highs will likely depend on the market’s reaction to this week’s plethora of key economic reports. On the S&P 500 ETF (SPY) chart, the ETF gapped and broke trendline resistance with a surge above 138.50. The gap held and should be considered bullish as long as it holds. With Monday’s gap down and Wednesday’s gap up, we also have an island reversal on the charts. Because this three day reversal was so extreme and looks out of place, I am opting to draw a trendline right through the gap zone to define the short-term uptrend. At this point, the gap zone, trendline break and trendline extending up from early April mark first support at 138. A pullback or consolidation is allowed after the breakout, but a move below 138 would be deemed too far and call for a reassessment.
It is a HUGE week for economic reporting. Also note that earnings season remains in full blast. This is the week that could make or break the bullish case. Chicago PMI starts it off on Monday. ISM Manufacturing and Auto-Truck Sales are on Tuesday. The first two reports (PMI-ISM) will tell us a lot of about the current state of the economy and could set the tone for the week. The employment preview starts Wednesday with the ADP Employment Change Report. We also have Factory Orders on Wednesday. The Challenger Job Cuts will kick off Thursday and ISM Services will also be reported in the morning. Most likely the market will have already made its move by the time Friday’s big employment report hits. A series of worse-than-expected reports would probably derail last week’s stock market breakout and put sell-in-May back to the forefront. A series of better-than-expected reports would justify the stock market breakout and could lead to further gains.