Traders seemed to like the prospects of low unemployment last week even though that could lead to the end of easy money from the Fed, a prospect that caused a sell-off just weeks ago. Last week’s price gains could be reversed soon as additional economic data and company earnings are released.

Stocks Change Their Mind and Gain on News Showing Fed May Taper Soon
On Friday, the employment report provided good news about the state of the economy and stocks rallied. SPDR S&P 500 (NYSE: SPY) gained 1.08% for the day and 1.62% in a three-and-a-half day, holiday-shortened trading week.#-ad_banner-#

Unemployment was unchanged at 7.6%, but the details in the jobs report showed some strength in the economy. The economy added 195,000 jobs in June, and estimates for gains in both May and April were revised higher. Average wages also rose slightly and are now 2.2% higher than they were a year ago. Given the low inflation of the past year, workers are finally seeing small gains in real income and that could be the basis of sustainable economic growth if the trend continues.

Good news on employment, however, could mean that the Federal Reserve will slow its pace of bond purchases. The prospect of less Fed buying sent stocks sharply lower a few weeks ago when traders sold after Fed Chairman Ben Bernanke noted that QE would end when unemployment fell. June’s job gains indicate the Fed could begin tapering as soon as September, as Bernanke noted.

Bernanke’s comments led to a decline in stocks. News that the economy is showing signs of improvement because of gains in the job market led to gains in stocks. These divergent reactions make it difficult to anticipate what will come next in the stock market.

After Friday’s gains, SPY is just a few cents below expected resistance at the gap created by the sell-off.

If SPY clears the nearby resistance, upside potential seems to be limited until the uptrend is confirmed with a break above resistance at $166. Weekly indicators are bearish, and I expect SPY to pull back based on the weak momentum.

Traders Losing Interest In Gold
SPDR Gold Shares (NYSE: GLD) lost 0.86% last week after falling 2.19% on Friday. GLD is now trading where it was in the summer of 2010. GLD holds about 960 tons of gold, the lowest amount since February 2009. Gold ownership among hedge funds in the gold futures market is also at its lowest level since 2009.

Contrarians view declining interest in an investment to be a buy signal. But the fact that everyone is fleeing a market is rarely a good enough reason to buy.

In addition to a contrarian buy signal, gold is oversold and offering a buy signal. GLD is now 10% below its 10-week moving average. That setup occurs rarely, with only four previous signals since 2004.

Action to Take –> The track record is split evenly with two wins and two losses a month after the signal. Short-term traders could consider buying if GLD moves higher using the 10% bands for price targets. These bands are found by adding and subtracting 10% from the 10-day moving average of the close. To use this strategy, a move above last week’s high would be the signal to buy.

This article originally appeared on ProfitableTrading.com:
Market Outlook: Stock Market Rally Should Stall at Resistance

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