I hope this is the last time I warn of a pivotal week for quite a while.
Everybody knows the markets, with the exception of the Nasdaq, have been passing time for the last five weeks. There has been plenty of day-to-day volatility but the +50, -50, repeat, cycle has kept us locked in a roughly 200 point trading range on the Dow. The S&P has been in a 25-point range except for a one-day drop on December 30th.
Markets go sideways for two reasons. They are either consolidating large gains or waiting for some critical event to pick a direction. Over the last five weeks, both reasons have been in play.
The nearly 200 point post election rally on the S&P needed to be consolidated and new money does not want to buy the top until after the event risk surrounding the inauguration had passed.
We now have three trading days until the event. Volume is expected to be low because everyone has already staked out their positions. However, if the negative headlines begin to increase in the coming week we could see some traders begin to get nervous and move to the sidelines.
Once the event has passed successfully, I believe we will see a relief rally but quite a few analysts are expecting a sell the news event as the rubber meets the road when the president elect promises begin to run into opposition in congress.
Rather than flip a coin and try to predict market direction about the only guaranteed outcome would be a market crash if there were a disaster at the event. How far the market crashes depends on how big the disaster. We have seen market dips on mass casualty events in recent years but investors have grown somewhat immune and now regard them as buying opportunities.
This is going to be a short commentary because nothing has changed from last week. Actually, nothing has changed in five weeks with the exception the S&P closes are clustering closer to resistance, suggesting we could see a breakout rather than a break down.
The problem is timing. I am not sure there is enough sideline money unafraid of Friday's events to power a breakout. Every attempt in the past has been met with instant selling but after five weeks, the sellers may be exhausted.
The chart really tells us nothing except the indicators are also moving sideways although still negative. Volume has declined as we head into next week and that is a sign of caution.
The S&P A/D line is about to break out to a new high and that correlates to the S&P closes clustering near the highs of the recent range. This should suggest a potential upside breakout.
The Dow chart is slightly more negative. The inability to hit 20,000 after five-weeks of trying is a major bruise to sentiment. The indicators are slightly more negative than the S&P and the 2,100-point rally has not seen any material profit taking.
The -181 point intraday dip on Thursday was a perfect spot for sellers to take control and they could not do it. The dip buyers arrived in volume but once they lifted the index back to 19,900, it was a dead stop. There are still sellers at the higher numbers but plenty of buyers under 19,900.
Nearly one-third of the Dow components were downgraded last week and the Dow only lost 78 points for the week. That is far from bearish and should be a sign the bulls are not afraid of the future.
The Dow A/D line is declining like the Dow indicators. This suggests the Dow is weakening more than the actual index is showing.
The Nasdaq Composite traded higher on 8 of the last 9 days and is showing no weakness. However, with any string of gains, there is always the eventual retracement. We saw it in early December and again in late December. After nine days of gains, the Nasdaq is due to rest. With the event risk for Friday and Netflix earnings on Wednesday and IBM on Thursday, this would be a good spot for some profit taking. The index did punch through uptrend resistance last week and the stutter step when it hit that level was minimal.
The Nasdaq A/D line is breaking out to a new high to confirm the breakout on the index itself. This is bullish because the rising A/D line is not possible with just the top ten big caps lifting the index. This means there is support from the rest of the tech sector.
The Russell 2000 has an interesting chart pattern. With only a couple deviations the flag at the top is being well respected. In theory, this is a continuation pattern that should breakout to the upside. However, that assumes an uneventful calendar. Next week is hardly uneventful.
The cumulative advance/decline line for the small caps is weakening slightly and the MACD is extending its decline. This suggests the next move on the Russell could be to the downside.
The broadest index is the Russell 3000 and the candles have been clustering at resistance just like the S&P. This also suggests the next move could be a breakout to the upside.
All things being equal, the market appears poised to move higher assuming an absence of negative headlines next week. I would want to be a buyer of index ETFs on any decline and I personally want to be long an ETF on Friday morning but fully aware a disaster could be costly. Limit your exposure and be prepared for a major market move.
Enter passively and exit aggressively!
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