A resolution of the multiweek sideways trend has occurred with the decisive upside breakout above resistance, as especially seen in the Nasdaq market. The S&P 500 (SPX) has followed suit and for a change SPX is following, not leading. Some would say that a sideways move is a non-trending market but I hold that a lateral move is a third option for a 'trend'. It tells us something technically.
As I have been saying for some time, a sideways move after a prior advance is most often a bullish consolidation before the uptrend resumes. However, and I can be a good gauge of market psychology in this, the longer the recent narrow sideways trading range went on, the more I began to wonder if the market might not (instead) be building a top.
A rectangle pattern can turn out to be either a pause before the dominant trend continues OR it could be an interim or even final top. I WAS paying attention to the recent strength in tech and there is no way that the Nasdaq Composite (COMP) and Nas 100 (NDX) could break out above prior tough resistance and start a run without the rest of the market bucking up.
I WASN'T paying a lot of attention to the bellwether Semi-conductor Index (SOX) and its bullish breakout above prior highs occurred well ahead of similar action in COMP and NDX. SOX has been in a very strong uptrend and it has often led the overall Nasdaq market higher in the past and it did so again.
SOX is also in 'overbought' territory according the RSI as seen above but when an index or stock is on a run, that has to be (somewhat) ignored. Price action is 'king' so to speak. Bullish sentiment is also at an extreme as will be seen in my CPRATIO indicator with the COMP chart. But again, an apparent overbought condition can go on for some time. It DOES mean that the market is at higher risk of downside volatility when bearish news comes out.
I also noted in my most recent Index Wrap column that I didn't think there would be a 'game changer' of a week ahead, which was, how should I put it, WRONG! In a low volume week, not much might happen but the bulls (or bears) can also push prices farther than they might otherwise. Historically, traders used to observe the tendency for a 'Santa Claus rally' and we got ours. On that note, Merry Christmas and Happy Holidays to All!
In terms of indexes that haven't been in the spotlight all that much lately, the Russell 2000 (RUT) was starting to show buoyancy and it achieved an important upside technical breakout this week also. The apparent double top RUT made at 625, would have (only) been 'confirmed' if the subsequent downswing after the second peak at 625 had led to a move that pierced the low made prior to the double top; that intraday low was 552. RUT ended up falling to 553 and made an approximate double bottom.
The subsequent rally led to the prior two highs at 625 being pierced yesterday. The ability of RUT to hold above its long-standing UP trendline was also a bullish omen. Way to go small and mid-cap stocks! We need this sector doing well for the economy to get moving again.
Not only did the Nasdaq Composite break out above a line of prior resistance but it did it in 'style' as the index gapped higher above that resistance as highlighted on the chart below. A strong run this week for the tech stocks and the overall Nasdaq is continuing to be led by the semiconductor stocks especially.
As I noted and as seen above, bullish sentiment is again hitting 'overbought' bullish extremes on certain days. This indicator is just not great solely by itself for timing tops when the market is in a strong upside run. No doubt traders and investors continue to like the prospects for tech stocks especially and after the pause in tech stock prices in recent weeks, the rally came back to life. If they can't knock em down, it's time to go back in and buy some more.
BIG CAP TECH, TOO BIG TO FAIL?
Just kidding, but the big cap Nasdaq 100 (NDX) is really off to the races from the looks of the weekly NDX chart. Quite a key aspect technically is that NDX has blasted through resistance suggested by the 2/3rds or 66% retracement level of the 2007-2009 decline. My rule of thumb is that if a stock or index has retraced more than 66% of the prior decline there is a good to excellent chance that there will be a retracement of the ENTIRE decline. That is, that the prior high may get re-tested and a 100% round-trip return occur.
NDX is also again at an overbought extreme according to long-term oscillators like the 13-week RSI seen above. However and again, I tend to place this fact more in the background rather than the foreground in this current market.
Last but not least in this round up of chart aspects pointing to a renewal of the bull market trend of recent months, is action in the S&P 500 (SPX). First and foremost, SPX has broken out above the top end of its trading range of recent weeks; i.e., above the rectangle pattern that suggested either a consolidation (of the existing trend) or a possible interim top. The resolution has been made to the upside. Unlike the New Year's variety, this resolution is one that should continue.
And ONCE AGAIN (see above) the S&P rallied once its 13-day RSI fell back to a 'neutral' mid-range reading in the 50 area. It didn't take a decline all the way down to an oversold reading and offers another harbinger of a strong uptrend. As I've often said, sideways moves are another way that a stock or index will 'throw off' an overbought condition, besides a steeper pullback.
I put a lot of stock in breakouts above or below key trendlines, more so with major trendlines as seen on weekly or monthly charts.
My last chart, that of the weekly SPX, shows that the latest weekly bar has definitely cleared the major down trendline dating from the late-2007 top. If SPX now starts moving above the 50 percent retracement level (relative to the 2007-2009 bear market decline), it will suggest a next potential target as being to the 62% Fibonacci retracement level at 1228.
Twas the Night Before Christmas and all through the House,
not a Bear dared stir let alone a small Mouse.
The Traders all dreamed of a big Bull Run.
Which surely would be tons of FUN!
To all a good night and a Happy Holiday break.
and ... GOOD TRADING SUCCESS!