If we look at the daily charts, or the weekly charts, or, for that matter, the monthly charts, then we can see we’re on breakout. It’s not gangbusters, but it’s a breakout, and it happened into very overbought conditions, which speaks to the strength of this stock market. It all took place after we received the made-up employment numbers from our Government. Nearly twice as many jobs created than was expected. Of course, they quietly leave out the number of folks who totally left the work force, which is an extremely high number. It doesn’t matter, the market loved the news, and was, thus, able to gap above the S&P 500 1320 trend line. It’s moved down some at that trend line, as all down trend lines do, over time. It seemed that the most obvious plan for today was to get a gap over 1320, only to see it fail as the day wore on. In other words, gap and fail. When you have RSI’s on the major daily index charts over 70, it’s only natural to think that this will be how things work out as the day moves along.
A nice dream for the bulls, but before the day is over, the bears will come in and seize the 1320 level back from the bulls. Not to be, and to be honest, a nice surprise indeed. This market has shown no inclination to ever get overbought for quite some time let alone get overbought and stay that way. Today, it got overbought, and for now, has stayed that way. That’s a real change in the trend. A successful day for the bulls, no doubt, but now they’ll need to keep this running a bit further in order to hold a successful back test. But for today alone, the bulls can feel good about what took place from a technical perspective. 1320 was cleared cleanly.
It’s so important to distinguish between a true sell signal and what will eventually be a pullback only. A sell signal says to get out of long set-ups immediately. It occurs when a number of different things become prevalent. First, if you see distribution volume, or abnormally high volume, on gap downs off tops. That’s never a good thing to see as big sellers come in off a new high reading in a stock, especially the index daily charts. The next thing to worry about is if you see good news getting sold. That means the good news was already built in, and now there’s no more energy left to carry an index, or a stock, higher. Lastly, if you see major negative divergences on the daily charts on the key indexes, you know there’s trouble on the horizon. None of these things are in the market for now. Maybe they’ll be there soon, but not yet. We are not seeing anything negative other than overbought, which is not to be overlooked. However, it only tells us a pullback will occur, and there’s nothing terrible coming once the selling kicks in to unwind the overbought oscillators. You don’t know when it’ll kick in, because it’s not a sell signal. So we wait for it, and we deal with it when it actually does kick in, but make sure you understand the distinction between a pullback signal and a sell signal. There are no sell signals in place at this moment in time.
The bears are going to look hard to find something about today that’s bearish. There isn’t anything. The advance-decline line was strong. The oscillators on the daily, weekly, and monthly charts are confirming the move with regards to momentum. There just isn’t anything for them to hang their hats on. When markets make important breakouts, or breakdowns, you want to look inside the numbers and verify the move. If the volume is too light, or the advance decline line is such that it’s showing too few stocks carrying the load, this is more bearish, and thus, the breakout should not be considered the real thing. We are seeing all the ingredients come together enough, such as we can mostly trust what we’re seeing, and that’s the key. The bears won’t want to rush in if things aren’t in their favor on the breakout. The bulls will feel braver about it and buy on any dips. This helps keep any overbought pullback from getting too out of hand to the down side. The bulls can walk away from today knowing that they basically accomplished what they needed to.
Long-term support now moves up to the 20-day exponential moving average on the S&P 500 currently at 1307. It’s racing up nicely as the S&P 500 moves higher. 1320 is the long-term down trend line, and sinking slowly with the 20-day exponential moving average only one percent lower, and forming a nice area of massive support for the bulls. 1370 is resistance. At some time we’ll need some type of back test, but we can look at the 1307/1320 level as very powerful support. An area where big money should support this market, not to mention those have missed the move, will be looking to get in. The bulls will want to put as much room as possible higher from here so as to distance itself from the 1307/1320 area, which can then be safely held on any few percent pullback to unwind overbought. The trend is now officially higher, but let’s see if the bulls can maintain the feel-good times, and hold this market above 1307/1320 for the short- to mid-term.
Peace,
Jack
(charts will be added shortly.)
