The massive rally on Thursday and crash on Friday has weakened the technical indicators.
The vast majority of technical indicators are either oscillators or moving average trackers. In each case the 350 points moves up and down on Thr/Fri have weakened their effectiveness. The 350 point gain on Thursday expanded the bullish divergence on the MACD and then the rebound on Friday confirmed that bullish print even though the intraday charts were ugly.
The result is that the charts look bullish even though we dodged a bullet on Friday. In theory, December should be bullish. This is the end of the year and portfolio managers will want to be fully invested for their end of December statements. The earnings cycle is over and companies should be working on completing their outstanding stock buyback authorizations. That means dips will more than likely be bought.
The intraday blip on Friday was a fluke. It was powered by a bogus news story and quickly erased. The only reason we did not close positive was the delay in voting in the senate and the weekend event risk.
If we ignore the very ugly candles on the charts, the markets appear to be overbought once again. We should ignore the candle because it was based on a bogus event that did not happen and was quickly erased. It was a reaction to an error.
Technical analysts will tell you that everything in the market is always priced into the charts. Good news, bad news and even unexpected news is factored into the market movement. While that is true, we periodically get news we are not expecting. That is what happened on Friday.
I am going to ignore the Friday dip as noise. The chart I always point to as evidence of market direction is the A/D chart for the S&P. If we ignore the Friday blip the A/D for the S&P is at a new high and solidly bullish. This is based on earnings, economics, a decrease in regulations and the expected tax cut. Investors are turning outright bullish as the tax reform process moved to the center of attention. Obviously, should that become derailed, the market will also leave the track.
S&P resistance is now 2,650 with support in the 2585-2600 range. The index is short term overbought and could do with a rest.
The S&P Bullish Percent Index exploded higher with 89 new S&P highs on Wednesday, 108 on Thursday and 38 on Friday. The Point & Figure charts are busting out into bullish buy signals across the board. The 77.4% bullish number is a 9-month high.
The Dow A/D line is equally as bullish and Friday's 350 point intraday drop did not even appear on the chart because most of the Dow stocks closed positive for the day.
The Dow chart is very overbought after the 673 point gain for the week. The indicators are positive but the chart is an example of what not to buy. The index should rest soon and this week would be a perfect opportunity before the budget battle later in the week.
The Nasdaq could be our trouble spot for the week. The index lost 41 points for the week when the Dow gained 673. That kind of divergence is never good. The big cap tech stocks are faltering with most negative for most of the week. The big decline on Wednesday was a drop from a new high and never a bullish event. The rebound on Thursday was lackluster and the index made a two-week low on Friday. There was a rebound from the triple digit decline but it was still a lower high/lower low.
Big cap tech sentiment is damaged. If we do not see a recovery in the big caps soon, we could see investors begin to bail and take profits for 2017.
The prior resistance at 6,800 is now support and that level was broken severely intraday on Friday.
The small cap A/D line began to deteriorate on Wednesday. The spike to a new high stalled at the opening print and held there all day. Thursday struggled to make a new intraday high at the open and then faded the rest of the day. Friday's decline erased 3% from the Russell 2000 but recovered most of the damage by the close. The small caps are not as bullish as the large caps despite the Tuesday spike. If the Russell and the S&P-600 were to set a new intraday high next week it could be a trigger for a new move higher. However, the small cap internals are weaker than the big caps.
The Russell 3000 closed at a new high on Thursday and only declined 3 points on Friday. This is the broad market. As long as the R3K can continue higher or even just hold its current gains the major indexes are not going much lower.
The market is at a precarious point. In theory, it should be moving higher but Friday's panic selling may have damaged sentiment. If the budget battle next week turns contentious, the market could retrace some gains and wait for the various votes to complete. December is normally good for about a 1.5% gain on average since 1950. With the market vacillating 2-3% on Friday it demonstrated we could capture the gains for the month in just a couple days even if we paused this week for a political rest.
I would continue to buy the dips but be careful of any major declines. We need to post several days of gains to convince investors it is safe to go back into the water.
Enter passively and exit aggressively!
Send Jim an email