The Indices

There was a lot of churn in this weeks market but the indices were able to move higher, the uptrend is still intact. The question now is, can the market move up for one more week? The answer is yes but depends on trade talks, the data, and nerve. How nervy is the market and will it be willing to hold on to stocks another week, or is it time to start taking profits?

The S&P 500 advanced 0.64% to close the week out near the top of the 5-day range. The index is creeping above my long-term uptrend line and may go higher but there is some risk. The indicators are bullish but momentum is highly divergent and prices are overbought so a pullback is needed for the rally to continue, if not due. Also, just above Friday's close, is the 2,800 market. This psychological round number may provide heavy resistance as it did in the October/December 2018 period.

Resistance at 2,800 is easier to see on the weekly charts. The line is consistent with the top of a very wide congestion band that eventually sent prices down to their lows in late December. Momentum is still rising on this chart, and stochastic has plenty of room to run, so I would expect to see 2,800 tested. It is the result of that test that will spell out the market direction for the near-term. If resistance is confirmed here tests of support at 2,700 and 2,800 are very likely as we progress toward and into the 1st quarter 2019 earnings cycle.

The NASDAQ Composite advanced 0.90% on Friday to push through the 7,500 level and set a new high. The index is moving higher on a wave of bullishness but that wave may soon run its course. The MACD momentum continues to weaken and diverge from rising prices and suggests a pullback in prices or test for support is inevitable. That being said, prices could rise for some time and the pullback could be small or large, it just depends on the market. For now, the index is facing potential resistance at the 7,570 and 7,660 levels that may cap gains in the near-term. A fall from this level would probably find support at the long-term moving average.

The weekly chart shows the same picture for the NASDAQ Composite. The near-term outlook is bullish but technical signals lead me to believe a retest of support is coming, probably before or coincident with the first quarter earnings cycle. The signal is this; the bearish MACD peak formed in December is an extreme peak, there are no others that strong for many years. This peak suggests that a major shift in underlying market dynamics is underway, something akin to a secular consolidation and stock market rotation, and a high probability the December lows will be retested before the rotation is over.

The Dow Jones Industrial Average advanced 0.70% on Friday and set a new high. The blue-chip index is moving up from support at a long-term uptrend line and looks like it could go higher. The moving averages have formed a bullish crossover and that is supported by MACD and stochastic although there are some red flags. Primarily, MACD and stochastic are showing divergent, overbought conditions ripe for reversal. If the index does move lower and support is not found in the range of 25,500 to 25,750 a deeper move, possibly to 25,000 or 24,000, is likely.

The weekly chart shows the blue-chip index trading right at a potentially strong resistance level. This level is just above 26,000 and coincident with the November/December highs set last year. The indicators are bullish so a test of this level is likely, a break above it is possible, with a possible target as high as the all-time high.

The Dow Jones Transportation Average posted the only decline on Friday, about -0.37%, after posting a much larger loss intraday. This move is concerning for two reasons including the transports tendency to lead the market and growing signs of weakness in the broader markets. The candle formed is a Dark Cloud Cover but mitigated by the visible lower shadow which reveals buyers were ready to buy when prices fell. The indicators are consistent with a peak, consolidation, and possible reversal in prices so I would expect to see sideways movement at least. A move lower may find support at Friday's low, a move below there could take the index down to 10,300 and the long-term moving average.

The transports were able to create a green candle this week and close at a new closing higher but the candle is small and has an upper shadow indicative of resistance. The index isn't so much at a resistance line as it is trading in the middle of a highly contested congestion band that dates to the October/December 2018 time frame so possibly strong. The indicators are bullish so upward price movement is still indicated although I might wait for a better signal on the daily charts before putting my money down.

The indices moved up for a ninth week and look like they might move up for a tenth. The move is supported by rising trade hopes but disconnected from earnings fundamentals so there is some risk in the move. The market may continue to move higher as the trade-talks progress but, once we clear this hurdle (assuming we clear the hurdle) and the market refocuses on earnings I think we will see profit taking set in. I hate to call tops because they never unfold the way I think but I am calling the possibility of a top and urging caution for the next week. I remain firmly bullish for the long-term, neutral and patiently waiting in the near-term.

Until then, remember the trend!

Thomas Hughes