Expect lower volume as it's a shortened trading week and there isn't much economic news out other than Jobless Claims and Existing Home Sales on Thursday. Overall the S&P 500 SPDR (ARCA:SPY) remains in an uptrend, and managed to eek out a new high last week, but couldn't follow-through. Unless the price recovers those highs quickly, the lack of follow-through on the new high indicates a pullback to at least $181.25. Until there are more concrete signs of a reversal, trading the long side in strong stocks and sectors remains the prudent play. The following stocks and sectors remain very strong.
Technology Select Sector SPDR (ARCA:XLK) solidly created a new high at $36.05 last week, clearing the former mark of $35.76. Giving back some ground late in the week, ideally traders will want to see strength early this week indicating the price action has some follow-through ability to upside. No strength early and it signals the bull trend is slowing on a short-term scale, and increases the chances of a deeper pullback below the stop area. Pullback into the $35.50 to $35 still present buying opportunities, with a stop below the recent low at $34.83. If the price drops below $34.83 a deeper pullback is underway. The next upside target is $36.40 to $34.60 based on two different Fibonacci extension levels.
Computer hardware was one the driving forces behind Technology being a top performer last week. Computer maker Hewlett-Packard (NYSE:HPQ) was up 7.58% as it broke aggressively through resistance at $28.70. The rally is expected to extend to $31.20; another target is at $32 should the price continue beyond the former. A small trendline connecting the December and January lows provides a guideline for future pullbacks and potential buying opportunities. The trendline, currently intersecting just below $28, can also be used as a stop level. If the price falls back below that the longer-term picture indicates a significant move lower could develop.
Health Care Select Sector SPDR (ARCA:XLV) continues to perform well, holding up well against sell pressure which developed late last week across most sectors. This relative strength indicates another upside move is likely; target is $58.40 and $58.75. Both targets are likely out of range this week, but could be seen over the next two or three. Should a pullback develop, a long between $56 and $55.60 looks good with a stop near $54.90. If the price drops below that it indicates the short-term trend may be shifting and a deeper correction is potentially developing.
Illumina (Nasdaq:ILMN) is part of the biotechnology space which continues to produce some huge gainers. Illumina was up 16.86% last week as the trend accelerated with a strong 8.85% jump on January 17. Based on the gap created by the move the stock will mostly appeal to short-term traders at this point, looking to exploit volatility and increased volume. Watching for a breakout above $141 or below $134 (January 17 intraday range) will likely result in tradable moves in either direction. January 28 is earnings, and the last three announcements have all resulted in gaps higher as well. Trading follow-through volatility after the announcement is favorable as risk can more easily controlled, compared to holding positions announcement.
The Bottom Line
The trend still remains up for the S&P 500, but a lack of follow-through above recent highs will indicate the short-term trend is slowing. Lack of follow-through in turn means an increased chance of a deeper pullback. That said, a strong upward push gives new life to the uptrend, and therefore, being long and focusing on strong stocks and sectors is still the prudent play. As of yet, price action hasn't given a reversal signal, which occurs when the price of major indexes or sector ETFs make a lower swing high or a lower swing low.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.