April trading is typically interrupted by bouts of volatility but no material declines. This year may be different.

There are multiple forces that manipulate trading in April. The quarter end window dressing can be withdrawn in the first week if earnings are not expected to be good. That should not be a problem this year since Q1 earnings will show close to 10% growth. Portfolio managers should be interested in holding positions ahead of earnings on expectations of a continued climb.

In normal years, there is a bout of volatility immediately before and after April 15th as money is extracted to pay taxes. This year could be a little stronger than normal because of the big gains in Q4. This tax payment dip is normally short in duration and provides a buying opportunity.

This year there is an additional complication. The last week of April, when the biggest flow of earnings reporting begins, is also the week that lawmakers will be fighting over funding the government and raising the debt ceiling. With the current hostility in Washington, anything and everything, including government shutdown is possible. While I would like to think calmer minds will prevail, that would probably be an over optimistic view.

Last week was powered by window dressing or at least that is what the charts are suggesting. Assuming everyone does not run for the exits on Monday, the next two weeks should be relatively calm. There are some economic reports that could be ignored and a relatively light calendar of Fedspeak.

The next two weeks should be highlighted by pre-earnings announcements. We have not had any major warnings and the individual news has been positive for the most part. This could fuel any ramp into the actual earnings report cycle, which kicks off on the 13th with Citi, JP Morgan and Wells Fargo. If there was going to be a selling event, I would target Friday the 14th.

Obviously, all those comments above are just speculation based on years of events. No two years are ever alike so it is up to us to plan for the worst and hope for the best.

The S&P has plenty of resistance to fight if the market attempts to move higher. The rebound from last week just barely moved over prior support at 2,360 and the close was 34 points below the March 1st high. With the S&P closing almost exactly in the middle of its recent range, it could head in either direction. Technically the chart is still negative until the downtrend resistance has been broken. If last week was just a window dressing week then we should know by the close on Tuesday.

The Dow remains the weakest index with two clear lines of resistance. The horizontal resistance is 20,750 and it has been tested multiple times. Multiple Dow stocks that posted significant gains after the election are finally seeing traders take profits. This could continue until April 15th as winners are sold to raise cash.

The Nasdaq Composite squeezed out a new high on Thursday at 5,914 to best the March 1st high by 10 points. Friday's minor decline was encouraging but it could have been due to a final push for window dressing to pin the large caps and the index at the highs for the quarter as the quarter ended. That does happen a lot.

The MACD is about to turn positive again but we need one more good day of gains to break free of that new high resistance. Even though we closed over it, the 5,904 resistance is still exerting its magnetic pull.

If there was ever a chart that screamed window dressing it is the Russell 2000. The Russell set 4-month lows the prior week then moved progressively higher without any volatility right into Friday afternoon when it hit 1,390. There was a dip at the close on all the indexes as traders tried to jump in front of any undressing that may appear next week. However, the apparent rotation out of large caps and into a broad number of small caps is textbook window dressing. Portfolio managers wanted to show they were diversified at the end of the quarter.

The resistance at 1,388 has been tested multiple times over the last four months and a breakout there would be dramatic and could actually boost market sentiment significantly.

The Biotech Index dipped back to support at 3,475 several times the prior week and never broke through. The rebound may have also been a touch of window dressing and the index stopped in the middle of its recent range. The Nasdaq and the Russell will need the biotech sector to continue to rebound in order for the larger indexes to push higher. I am not seeing any indications of that at this point.

The Semiconductor Index is at a new high and that is always positive for the Nasdaq. The $SOX leads the Nasdaq and they were in lock step last week.

Over the last year, I have shown this chart multiple times. The numbers have not changed from the initial calculation in early 2016. The tight range in 2015/2016 projected a breakout or breakdown of 324 points from that range. The upper target of that breakout zone is 2,450. When I first labeled that over a year ago with the S&P at 2,125, it seemed a long way off. After the post election rally it is suddenly looking a lot closer and I would not be surprised if we hit that level in 2017.

If we can make it through April without a disaster, the sell in May cycle could be interesting. If April earnings are as good as expected, we could see more investors remain in the market over the summer. Yes, summer rallies do sometimes occur. However, if the April earnings guidance is choppy or negative or the situation in Washington begins to melt down without any progress on taxes, healthcare or infrastructure, the sell in May cycle could be significantly worse.

Investors are overly optimistic at present but they also appear to be getting nervous. Uncertainty is market negative and we will need to see some progress on the Trump policies by the end of April or it could be a rough second quarter.

Enter passively and exit aggressively!

Jim Brown

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