A 2.6% gain on the S&P and 4.0% spike in the Nasdaq would look even better if we could repeat it this week.

It is amazing to look at the difference from Friday's charts and the charts from the prior Friday. They are night and day different with indexes at 2-week lows the prior Friday and record highs this Friday. The oscillators and the momentum indicators are now significantly bullish.

The charts are blind to past results. They only report what happened in the market. Humans reading the charts assign all the bullish and bearish outlooks as though they were reading tea leaves.

The same is true with the oscillating indicators. They simply react to momentum, volume and moving averages.

After four strong days of gains, we would expect all the indicators to be positive. We have to read those indicators cautiously because a four-day rally is not yet a trend. It may turn into a trend and once it has a track record, the indicators will again be beneficial.

The primary indicator remains the A/D line on the S&P. With the S&P closing at a new high on Friday, the A/D line did as well. No surprise there. A warning signal would be a slowly rising market and a declining A/D line. That is what we will watch for in the future.

An even more bullish chart is the Bullish Percent Index. This is the percentage of the S&P stocks that have a current buy signal on a Point and Figure chart. The BP Index has exploded higher over the last month to the highest level at 82.4% since July 2014. This is a major breakout and very bullish.

The percentage of S&P stocks over their short-term 50-day average rose to 82.8%. The percentage over the longer-term 200-day average rose to 79.8%.

The actual S&P chart has shifted from consolidation mode to breakout mode to overextended in only four days. That 69-point gain last week has put the index in danger once again and in need of another consolidation period. The S&P is now 178 points or 6.9% above its 100-day average. That is an extreme divergence. We have a once in a generation event with the tax cuts and it has produced the largest point spread deviation in history. I do not know if there has ever been a 6.9% deviation in the past. Just trust me when I say it is extreme.

The Dow A/D chart is also at a new high and as you can tell from the last six months it has been the market leader. Even with the big 576-point gain from last week, the MACD just barely turned positive because of the choppy market the prior two weeks. In this instance, the indicators are following rather than leading. The negative cross over at the end of October was a leading indicator. The Dow was trading sideways but the oscillators were sharply negative.

The MACD is just turning positive again despite the monster 4-day gain on the index. The Dow is over extended once again despite the two-week consolidation period. The breakout above the regression channel is a short-term sell signal with the center line back around 25,000 for support.

The Nasdaq Composite A/D line finally broke out but it was a battle. The Nasdaq has been choppy since August. It was acting like an actual market with periodic minor declines every 2-3 weeks all along the way. The A/D reflects this choppiness.

The Nasdaq Composite gained 233 points and the Nasdaq 100 gained 257 points. Both of these were short squeeze rebounds from a two-week low close the prior Friday. A 4% gain for the week on the Nasdaq 100, is extreme and put the index back into over extended status.

The Russell 2000 is still the weakest index with only a minor breakout over prior resistance at 1,550. The index has posted consecutive 2, 3 and 4-point gains over the last three days while the big cap indexes are surging higher.

The correlation between the FANG stocks came back together last week with each of the big caps moving as one compared to their prior divergence. This is why the Nasdaq soared to new highs. When all the generals are charging forward, the indexes will move.

The semiconductor sector also rebounded and allowed the Nasdaq to rally. The chips were led by Nvidia, AMAT and others while Intel was sinking.

I am as thrilled by the rally as any other investor, other than the bears, but we know this cannot continue at this pace. The outlook is still positive but there will be a pause at some point. We saw a month's worth of gains in four days and that is not normal. Even wildly bullish markets can pause for profit taking at any time. Be prepared. Keep your stop losses tight if you do not want to give back your gains.

Enter passively and exit aggressively!

Jim Brown

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