Despite being overbought, the major indexes continued to pack on the points.

The Dow managed to add 368 points for the week, S&P 29 and Nasdaq 94. Even the Russell 2000 added another 19 points to finish only 2 points below its recent high. The Dow and S&P broke their consecutive streaks but the Nasdaq stretched its winning streak to nine days.

The week started out with three days of quarter end cash flows fueling the rise and then shifted into a rotation back into large caps with the Nasdaq closing at a new high.

The internals were negative on Friday despite the minor losses on the Dow and S&P. Decliners of 4,197 beat advancers of 2,880. Declining volume was 3:2 over advancing. New highs dropped from 1,019 on Thursday to 571 on Friday. Three days last week had more than 1,000 new highs with Tuesday the winner at 1,140. Those are very strong numbers and the most since June 2nd at 1,108.

Despite a minor setback on Friday, the advance/decline line on the S&P is still strong. This is our unofficial sentiment indicator for the market. As long as the A/D line is rising the market will continue to rise as well. The S&P has been seeing a lot of buying even when the Russell was leading the market higher. Note that over the last two weeks the A/D line was unbroken until Friday's minor dip. The positive expectations for earnings are lifting all stocks.

The S&P blew through the uptrend resistance at 2,525 but stalled at 2,550. That level is decent resistance because numerous analysts had pegged it as the year end closing level along with 2,500. Over the last two weeks we have seen some estimates as high as 2,650 and 2,700 so analysts are seeing green shoots everywhere and upping their numbers.

The oscillators are still positive and there is no sign of an impending decline. We will probably see some profit taking at some point this week but it should be minor. With Q3 earnings launching on Thursday with the banks, investors should be placing their bets rather than taking chips off the table.

The Bullish Percent Index on the S&P has risen since mid August but it is approaching resistance at 73%. This is the percentage of S&P stocks with a current buy signal on a Point and Figure chart. Basically this is a combination of 500 charts to show a sentiment trend.

The Russell 2000 has rebounded 162 points from the August 21st low but it is showing no indications of an impending sell off. The rally stalled at 1,510 and the index spent the last four days consolidating its gains without any material declines. This is remarkable. It does not mean there will not be a decline but investors have jumped on every minor dip and there is no reason for that to end ahead of earnings.

Note that the A/D line for the small caps faltered last week just like the index itself. The A/D did not decline but the steady rise did come to a halt.

The Dow only missed a new high on Friday by less than 2 points. When you consider the weekend event risk and the 386 points gained for the week, that is bullish. It means that even in the face of negative headlines, investors were not willing to sell. If it were not for the $1.50 drop in crude prices, it would have been a positive close.

The banks begin reporting Q3 earnings this week with JPM before the bell on Thursday. They are expected to beat estimates but the conference call will be the key. With rate expectations rising, the bank should have positive guidance. JPM rarely moves the market but along with Citigroup on Thursday, they will definitely move the financial sector, which is already at post crisis highs. That would impact other Dow components including TRV, V and AXP.

The Dow is well over uptrend resistance and support is well below. Any material dip will likely establish a higher support level rather than fall back to the September level at 22,250. That would be a 500-point drop to get to that level and without North Korea launching a nuke into the Pacific, I do not see it happening this week.

The rotation back into the big cap tech stocks helped lift the Nasdaq to new highs. Near term resistance is around 6,650 and prior resistance at 6,460 should now be support. The big cap tech stocks being reporting on the 16th with Netflix and the top ten tech stocks do move the market when they report. With the Nasdaq extended over prior resistance it may be susceptible to some profit taking if we have some earnings disappointments.

The Nasdaq A/D line has also been almost unbroken for the last seven weeks and that streak will eventually end. There is no comparison to the prior four months.

The semiconductor correlation with the Nasdaq remains intact with a perfect match over the last two weeks. The chip stocks are making new highs but they are at the top of their recent trend and extended well above the 100-day average as support. I do not see them declining that much because everything you buy is full of chips. Eventually profit taking will appear and it could come after earnings.

There are no major events on the horizon that should knock the market lower next week other than some stupid move by North Korea on Tuesday. The economic reports are not market movers and everyone should be expecting further gains rather than a sudden decline. However, the market does not care what we expect and the algorithmic computers could disrupt it at any time. I would continue to buy the dips until proven wrong.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email