The S&P finally broke through 2,400 and could be poised to move higher.
It is amazing how fast market internals and market sentiment can change. Normally it takes some big catalyst to reverse a market trend but we did it last week on almost no news and weakening economics. The only three factors actually impacting the market were earnings, politics and the Fed.
The Fed discussed a plan to let their $4.5 trillion balance sheet roll off as treasuries matured and to halt the process of replacing those matures treasuries with new purchases. They will have a cap to prevent the portfolio from declining to quickly. For instance if they have $40 billion in treasuries maturing in a quarter they may cap their replacements at $20 billion. That means $20 billion would mature and disappear and the Fed would purchase $20 billion in new treasuries to replace the other $20 billion that matured. This would start the process in unwinding the QE process but it would take a long time for it to have any real impact. The projected slow and steady pace was pleasantly received by the market.
The lack of any political firestorms aided in lifting the market. After the last several weeks where political headlines had a depressing influence, it was a relief to avoid those disturbances.
Earnings were still the biggest mover with Q1 in the bank with 15% growth and the next three quarters also expecting double-digit growth.
These factors allowed the indexes to rebound from the sharp decline the prior week. The MACD sell signal on the S&P was reversed and there was no follow on selling after the big Wednesday decline.
The S&P has broken out above resistance at 2,400 and long-term uptrend resistance if around 2,450.
The following chart I built a year ago projecting the potential breakout from the consolidation pattern on the S&P. At the time I projected a S&P target of 2,458 and we are nearly there. This was calculated by adding the points in the consolidation range to the top of the range. In theory, a breakout should move that number of points above resistance. I have changed nothing on the chart since May of 2016.
The Dow has broken over strong resistance at 21,000 but has yet to break out to a new high over 21,115. That would be the all clear signal for the broader markets to run higher. The MACD sell signal has been reversed and many of the Dow components have seen a significant improvement in their individual charts. The outlook for the Dow is now positive if it can move over 21,115.
The Nasdaq indexes are both in breakout mode and over long term uptrend resistance. The MACD is reversing but not yet back in bullish mode. The minor gain on Friday was the result of weekend event risk and very low volume.
The most bullish chart of the week is the cumulative advance/decline line on the S&P. There was a clear breakout and even the MACD is accelerating higher. This is a major change in the market internals since the Wednesday crash the prior week. The dip was bought and market breadth expanded significantly. The A/D line on the Dow also improved but not as much as the S&P.
Despite the improvement on the market breadth on the S&P the bullish percent index failed to recover and actually declined slightly from the prior week. This is a slow moving chart. The point and figure charting system on which this is based is a slower reacting system in both directions. It is intended to give longer term directional signals.
I view the improving A/D line on the S&P as significant. If the S&P can move higher from Friday's close, it would trigger another round of short covering from the unbelievers and some price chasing by portfolio managers caught looking the wrong way with expectations May would be the start of the worst six months strategy. By failing to continue the Wednesday decline they were caught either short or in cash and any continued rise will force them to change their market posture.
If the Dow can move over 21,115 we should be in good shape to extend the rally assuming the political headlines don't tank the market again.
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