For at least three weeks the market has been stuck in a rut with divergences between the major indices being the defining characteristic. As of yesterday, most all divergences were removed, and if you continued to lean with the prevailing trend, then you were rewarded once more.
Let’s take a look at what yesterday’s new break higher means.
The two most important takeaways are (1) that this has the potential to run into the end of year and through early January, and (2) that the potential gains to come are significant -- another 3% to 4%.
After working sideways for so long, the overbought market has resolved that extended state through time rather than price. Other than one jostle lower a week ago which was quickly erased, this market has worked sideways for two to three weeks without any price depreciation.
Yesterday’s outperformance by the Nasdaq
(INDEXNASDAQ:.IXIC) and Russell 2000
(INDEXRUSSELL:RUT) -- which, until yesterday, have lagged badly, creating the divergences in the major indices -- was a very good signal. Healthy markets are typically driven by smaller, more nimble firms as well as those that are more technologically savvy. The more stodgy bread-and-butter firms found in the S&P 500
(INDEXSP:.INX) and Dow Jones Industrial Average
(INDEXDJX:.DJI) have a hard time keeping up in an advancing market.
Assuming this breakout has legs, then the immediate question is how far it can go now. To answer that, let’s take a look at a few charts starting with the S&P 500. On this index, the bullish ABCD structure that was already in motion but that had failed to gain traction is back in vogue now, as seen in the chart below. The ABCD structure points to another 4% gain still to come.
It just so happens that the daily ABCD pattern comes quite close to the same pattern that exists on the monthly chart, which targets another 3%.
On a side note, as you can see, and as has been talked about ad infinitum
, volume continues to tail off as price continues to advance. Classical technicians keep fighting this trend and pulling their hair out. Neoclassical theory tells us that the average volume
means nothing though. It’s only at points of significance that volume has any importance. Those points are the anchor bars and resulting zones that emanate from them. So the next time you hear someone bemoaning how volume is lacking and that it is a major issue, just tell them it doesn’t matter in general. It only matters at particular points and on the charts and is but one of three indicators that should be used. Time and price are the others, of course.
Inside the S&P 500, the most interesting sectors have been transportation and technology, but financials are now starting to perk up, and the regional banks in particular are showing extraordinary strength as exhibited in the SPDR S&P Regional Banking ETF
(NYSEARCA:KRE). Here are daily and weekly charts showing breakouts on multiple time frames; this typically leads to a faster continuation move in the direction of the break. Note that the daily chart has already performed the retest and regenerate sequence and should move now.
Now that the indices are confirming more “up” to come, you need to be doing the same -- or at least not fighting it. The key today is for the breakouts to hold and for the Russell to start catching up to join the senior indices. If that happens, the run into the end of year is likely in place and once more, you need to run with it.
Positions in SH, EEM, EWZ, KRE, QQQ, IWM.