The next two weeks lawmakers will try to walk a tightrope across a minefield of positive expectations.
The focus returns to Washington next week and both sides are heavily involved in pass or defeat the tax reform bill. This is where the rubber meets the proverbial road. The passage or failure of this effort between now and Christmas will dictate where the market will go in the weeks that follow.
Until it either passes or fails, the market will be walking on eggshells in fear of the bills failure or the inclusion of components that will be market negative.
We can diagram the current index charts 23 hours a day but it will not be the technical levels or the fundamentals that will drive the market. The market will be purely headline driven over the next several weeks. The earnings are over and economics are benign. Tax headlines should be the only market mover unless war breaks out somewhere in the world.
The major indexes have broken out to new highs in the normally bullish Thanksgiving week. The week that follows Thanksgiving has only been up one time in the last 7 years but it has been flat three times. Considering our recent gains, the extension in the indexes and the headline risk, I am biased towards some weakness but the Nasdaq and S&P charts are bullish.
The S&P closed at a new high on Friday, just over 2,600 on very weak volume. Analysts have been hedging their bets over the last 7-10 days with a 2600-2650 target for December. Some feel it will be early in the month and some at the end of the month. Only a couple of analysts are expecting a higher number.
The S&P charts have turned positive. The A/D line has turned up again with a new high over 4,400. This is positive despite the minor gain on Friday of only 2 points. The MACD is on the verge of turning positive more than four weeks in decline.
The Bullish Percent Index closed at a 4-month high at 73.4% meaning that percentage of the S&P stocks have a buy signal on a Point & Figure chart.
The percentage of S&P stocks over their 50-day average rose by 7% to 64.6% and reversed the four-week decline.
On the daily bar chart, the MACD is one day away from being positive and the CCI completely reversed from a single day of negativity to strongly positive. Overhead resistance if around 2,625, assuming the index does not slip back below the prior resistance at 2,600. This chart is turning bullish.
The Dow chart is on the edge of bullish. The A/D chart has rebounded to the top if its recent range and the bar chart has the Dow holding just below resistance at 23,600. The MACD is swinging back towards positive but it would take several more days of gains to turn it bullish. However, a decent Dow breakout over that 23,600 level is all we would need to trigger another market move higher. The Dow is the laggard in the market scenario.
The Nasdaq charts have had a miraculous turnaround. The A/D line has turned nearly vertical to the upside as did the percentage of stocks over their 50-day average, which rose 12%. The MACD in both cases has turned bullish.
The Nasdaq blew through resistance at 6,800 thanks to the normally bullish week for tech stocks. Why they are normally up over Thanksgiving week is always attributed to retail investors planning their end of year bonus investments. I do not care as long as the rally continues. The Nasdaq breakout is very strong and prior resistance at 6,800 should now be support.
The small cap A/D line went vertical on four days of strong gains by the sector. That rally stalled over the last three days but they are holding the recent gains. The spike in the Nasdaq helped power the small capo rally with the semiconductor sector making a new high. The S&P-600 blew through resistance at 920, which should now be support.
Despite all the end of year factors I discussed last week, the historical trend prevailed for a bullish Thanksgiving week. I hope the bullish sentiment holds as we wait for lawmakers to reach a decision. This is more than likely a binary event. The market will either surge higher or drop lower depending on the result. There are likely to be a multitude of headlines both positive and negative before the end result is known. We should expect an increase in volatility over the coming weeks.
I strongly recommend not chasing the markets/stocks higher until that result is known.
Enter passively and exit aggressively!
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