The summer rally

Stocks made a nice drop to major support levels, and have rebounded since the start of our lunar green period.
We now need to see some follow through this week, otherwise we can probably forget about a summer rally.
Let’s have a look at the S&P 500 (click for larger image):

The support level around 1550-1540 has held the market so far, and we are trying the upside again.
My Earl indicator has turned upwards and is showing a one month bullish divergence. This sets the stage for a rally, but we now need to see if this market has enough energy to continue upwards and get back above the downtrend line that can be drawn from the May highs.
If we do continue higher then we also have to start watching the old support line, which is likely to act as resistance now.
That means the S&P could initially struggle to get above 1650.

I do think we will test the overhead resistance this week, but I think the market will hesitate.
At that point a minor pullback would probably put us in a better position to charge higher again.
But that’s just a hunch.

***

As chart of the week I am taking a look at Coffee (KC) (click for larger image):

Coffee prices have been grinding lower since they peaked above 300 in mid 2011. The price is now down to 120, which happens to be our downside target for coffee this year (see our forecasts 2013).
The chart is showing an attractive setup at this point. The slower Earl2 is just starting to turn up from a major bottom, and the faster Earl has turned up as well, while also showing a bullish divergence with prices.
While that doesn’t guarantee a profit, it is as good as bullish setups get.
Coffee can be bought with a stop-loss just below 115 (nearest futures) and initial target ~135.
On a break above the overhead trend line, a further rally to 180 becomes possible.

Good luck,
Danny

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