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The S&P 500's Bullish Break-Through

Price Headley
Price Headley
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Even with the two heroic days the NASDAQ logged over the last five sessions (Tuesday and Friday), the index still hasn't managed to cross above the 50 day line. Yes, we're getting close, but we've been close before to no avail. As we said in our last Weekly Market Outlook, maybe this surge will be the one to get us over that hump, but so far, no dice. So what's that mean for the composite? Despite short-term bullish signals, we're still reserved here.

It's not that we're bearish and think the NASDAQ is incapable of crossing above the 50 day moving average (purple). Quite the contrary - we think it's only a matter of time before this tech-heavy index follows the lead of the Dow and the S&P 500 and breaks above these key lines. But the discipline of technical analysis dictates that you act on what the charts are doing, and not what you think they could be doing. And as of right now, this chart is just having trouble getting past the 50 day line. As long as that's the case, the intermediate-term trend is going to be stalled. The good news is that we may not have to wait that long. The 50 day average is currently at 2082.71, and with the NASDAQ closing at 2072.41, we're only 10 points under this critical mark. That's a difference of less than 0.5 percent, which is less than a day's work if the buyers can all get on the same page at the same time.

The problem is, they can't. You may recall last week that we said the volume had stayed surprisingly bullish even though the market had gotten choppy. Switch that. The volume turned a little less decisive this past week, even though the NASDAQ actually gained a few points. As before (and as always), the volume and the trend have to be in agreement to make a trend of any duration, and that's why the composite just can't get it going. Maybe it will all change by the coming week, but as now, the falling Chaikin line is far from encouraging. You can see on the bottom of our chart that the three selloff days were on relatively high volume, even if the index was slightly higher for the week.

In the meantime, we are impressed by the support the NASDAQ found at its 10 and 20 day moving averages (except Thursday). And more importantly, the composite closed above both of those short-term averages on Friday, which is at least one half of a short-term buy signal. Don't get too excited though, as this is the fourth time the index has 'crossed above' the 10 day line in the last month - the first three went nowhere. Nonetheless, we're on the top side of these 10 day average, so we have to be at least bullish about our short-term prospects. And if the 10 day average (red) can cross above the 20 day average (blue), that would be another important bullish sign to solidify the bullish MACD crossover from a few days ago.

Overall, we're slightly bullish here, with the NASDAQ breaking through a secondary resistance line (dashed). But the prevailing theme is still the trouble at the 50 day moving average. If we can get past that, then we'd expect a retest of this year's high of 2191.60, but that's still a big 'if'.



We finally did it. It wasn't clear whether or not the market had the right stuff to actually do it with this pass, but the S&P 500 finally broke to a new 52-week high on Friday. And just as importantly, it held onto those gains. That "take 'em home" mentality following a week chock full of economic announcements - and before a weekend - has more bullish implications than you may even realize.

But first, the break to new highs.....

On January 3rd of this year (the first trading day), the SPX hit 1217.90. By the end of that same session, the index would start a selloff that wouldn't stop until late January. At that point, a recovery was started, but it wasn't until this past week that we'd even have a shot at getting those losses back. In fact, it looked like 1212.30 (dashed) was going to be the stopping point, more than five points short of even threatening to move to new highs. That's where we topped out three weeks ago, and had it not been for Friday's rally, it would have been the high for this past week as well. But what a difference a day can make. To close out the week, the S&P 500 gained 11.65 points (almost 1%), hitting a high of 1224.76, and closing at 1222.12. We could talk about how bullish the indicators are, or how the momentum is in place now. But quite frankly, nothing speaks louder than results. A move to new highs usually is followed by more of the same, so the bulls should be excited about the large-caps at this point.

The interesting part is that it occurred on a Friday. The economic data was a bit mixed this week, and certainly couldn't be considered inspiring across the board. In fact, as of Thursday, a loss for the week was still a real possibility. But after considering the data, and the fact that they were 'stuck' with stocks until Monday, investors chose to buy anyway. This is the second Friday in a row we've seen this rush. It may make for a choppy week, but string enough of those kinds of Friday's together, and you end up producing a fairly decent rally. Based on the chart and the bullish interest we see now, such a rally is likely.

The technical signals agree. Our MACD lines are bullish, as are the DMI lines. We're stochastically overbought, but we were also overbought during November and December.....while stocks were roaring. We can't rally set a target here, as there's no recent reference point when you're moving to new highs. We'll update you here as soon as it looks like stocks are heading into a correction.



We have to admit that most of the indexes closed the week out pretty impressively. Normally a move to new highs is bullish, but if there's one thing we've learned in the last two months is that reversals can and do happen. With that in mind, don't dig in too deep just yet. If this is indeed a real rally, there will be plenty of opportunities for gains after we know for sure. Our worry is that this move will wind up being just like the one we saw during the first half of the January 3rd session. Things looked great then - until about noon. That's not to say we expect a repeat of that day. In fact, as charts appear now (not for how they might appear later), we clearly have to be bullish. But it will cost you very little to wait and see for sure. By Wednesday we should have a pretty good idea of whether or not this rally is the real thing. Volume will be the important clue.

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