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Tuesday Look Ahead: Technicians See Positives as Stocks Move Higher

Tuesday, 27 Jul 2010 | 1:49 AM ET

Earningsnews Tuesday may again be the catalyst for a stock market that's showing improving technical strength.

Wall Street
Wall Street

The Dow, for just the eighth time in history, scored triple-digit gains three days in a row. The Dow was up 100 points Monday at 10,525. Industrials were the best performing sector, up 1.7 percent, followed by financials, up 1.6 percent.

Stocks rallied into the close as a faint improvement in new home sales and an improved outlook from FedEx helped push transports and home builders higher. Still miserably weak, new home sales rose 24 percent in June, compared to the 3 percent expected. FedExraised its earnings guidance, saying it has seen higher-than-expected volume in its Express and ground businesses.

Tuesday's earnings include BP, which analysts are monitoring closely for costs related to the Gulf of Mexico rig disaster. BP is also expected to announce that it is replacing CEO Tony Hayward with Robert Dudley, who is overseeing the Gulf response.Valero Energy, Lockheed Martin, Tevaand U.S. Steelalso report before the opening bell.

The S&P 500 Monday finished up 12 at 1115, above its 200-day moving average of 1113 for the first time since June. "It is definitely important. It is a plus," said technical analyst John Roque of WJB Capital.

Roque was negative last month along with many other technicians, but he now says he has changed his view. He no longer expects the S&P to reach 950 in the near term. However, he still says that move could come later on. "There is some stuff that's improving and we should pay attention," he said.

Roque says NYSE cumulative breath is close to making a new high; the number of new highs has picked up and some bellwethers he watches have bounced, including copper. "1150 (on the S&P) is likely to happen," said Roque.

The market has made technical strides since the S&P broke back above 1040. It also made an important move Friday, when the S&P closed above the 1100 level.

"Friday was the first time since the early May correction began that we made a higher high in the market, so traders are trying to measure the move on how high this new uptrend can take us, with the next area to watch at 1131 (on the S&P 500)," said Scott Redler of T3Live.com, who watches technical moves on a short term basis.

"Traders are starting to hold positions a little bit longer, as trust comes back to the market. We're not just renting stocks. We're owning them," he said.

What Earnings Say

So far this quarter, S&P 500 companies are showing earnings gains of about 40 percent, much better than the 27 percent expected.

Deutsche Bank chief U.S. equities strategist Binky Chadha monitors company comments, as they report, and he sees a promising trend.

"The tenor of most of the corporates is that they are optimistic, basically on U.S. growth prospects. A number of them noted an acceleration quarter-on-quarter in top line growth," he said.

He said some multinational companies went into the quarter, saying they saw no sign of slowdown in their European businesses. He says they've stuck with that view and said it again as they reported earnings.

"The key thing that matters is the three- to six-month outlook. If this recovery happens, it will be driven by corporate spending, and I think there are very clear signs that they are spending on sales and marketing. They are spending on cap ex...They are talking much more than they have in the past about what they are going to do with their cash. Just talking about it means they're not negative," said Chadha.

Chadha said, however, the market has likely made much of its earnings-related move, and it will now need economic improvement to propel it.

"The market is still basically trading off of the macro," he said. "There are two joint necessary conditions for the market to go up. One is earnings and number two is macro data. The market is up quite a lot from the bottom, but basically it has remained perfectly correlated to the macro data surprises." He points out that two of the big market moves recently came on better-than-expected home sales data last Thursday and again on Monday.

"The market did not go up on FedEx earrings. It went up on new home sales data," he said. The correlation between the macro data surprises, tracked by Deutsche Bank, is running at about 85 percent, well above the correlation in normal times of 30 to 40 percent. "The outlook for the equity market is not really about earnings. The earnings box has been checked," he said.

Chadha said economists are now taking down their estimates, and the numbers should ultimately start to beat their expectations, a positive for stocks. He also said the correlation of macro data is much stronger with the Treasury market, which saw the 10-year yield rise back above 3 percent Monday. The 10-year yield was unchanged at 2.996 percent at the end of the day, and the 2-year was yielding 0.6 percent.

John Spinello, Treasury strategist at Jefferies, said he expects yields to continue to edge higher. "As we work through the auction process, I could see us backing up another 10 points. You have month-end on Friday, and that will keep the back end fairly bid," he said. Spinello said some of the big foreign buyers that had been in the market in recent sessions were not there Monday.

What to Watch

Tuesday's economic data includes S&P/Case-Shiller home price data, released at 9 a.m., and consumer confidence, expected at 10 a.m. There is also an auction of $38 billion in 2-year notes at 1 p.m.

Earnings are also expected from SAP, Deutsche Bank, Occidental Petroleum, Ecolab, Nasdaq OMX and Under Armour. After-the-bell earnings are expected from DreamWorks, Aetna, Aflac, Boston Properties, Norfolk Southern, Nalco and CB Richard Ellis.

Questions? Comments? Email us at marketinsider@cnbc.com

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