Though some analysts discounted last Monday’s higher open and the S&P 500 gain of 1.55% as typical bear market activity, it provided the first evidence that the worst of the selling was likely over. The S&P 500 added to the gains on Tuesday, which caused further improvement in the technical outlook.
In my early Wednesday morning post, it was clear that one more day of strong price action with bullish Advance/Decline numbers would complete the bottom formations in both the S&P 500 and Nasdaq 100 A/D lines. The post was updated at 3:30 PM, when it was clear that the A/D numbers were going to close very strong.
It was a stellar week, with the markets led by the beaten-down Nasdaq 100, which was up 6.46%. The Dow Industrials gained 5.16%. The S&P 500 was up an impressive 4.85%, which, along with the Nasdaq 100, had their best weekly gains since December 2011.
Wednesday’s comments from Fed Chair Jerome Powell clearly reassured the market, but there was also quite a bit of buying demand that had built up. At the start of the week, less than 30% of the S&P 500 stocks were above their 50-day Moving Averages (MA’s). The CNN Fear & Greed Index was in Extreme Fear territory just a week ago. Stocks held up well on Friday, despite the looming uncertainty of President Trump’s trade meetings with Chinese President Xi Jinping over the weekend.
In October (A Survivor’s Guide To Market Corrections), I reviewed several past market corrections and explained how I have successfully used the formations in the A/D lines to signal when the market corrections were over.
On Wednesday, I pointed out that even though the Invesco QQQ Trust (QQQ) had made a new low of $157.13 (point 2) on November 20, the Nasdaq 100 A/D line made higher lows (point 2), a bullish divergence (also indicated by line c).
The A/D line’s downtrend (line b) was the key resistance, and it was overcome last Wednesday as the November 7 high in A/D line was also overcome. The bar chart reveals that the price downtrend (line a), has just been reached, which may cause some to think the rally is over. However, the technical data, specifically the higher A/D line, suggest the rally will continue.
The market’s reaction to Trump’s talks with China could certainly cause the market to move lower on Monday. If there is a pullback, my A/D analysis indicates it will be a buying opportunity.
This conclusion is reinforced by last week’s action of the weekly S&P 500 A/D line. On Friday, November 23, the S&P 500 A/D line had dropped below its WMA. Therefore, a higher close this past week would move it back above its WMA, creating a bullish zig-zag formation.
The Spyder Trust (SPY) gained over 3% from Tuesday’s close, and there were many more stocks were advancing than declining. The weekly S&P 500 A/D line therefore moved above its WMA and the prior peak, as it started a new short-to-intermediate term uptrend. In April of 2018, there was a similar bullish signal (see arrow).
Many are looking for the SPY rally to fail below the recent highs in the $281 area (line a). The A/D line has already overcome its corresponding high, which means prices should follow. On the recent decline, the A/D line held the support (line c), while prices dropped further as support at $267 (line b) was broken. Therefore the A/D line was again stronger than the average.
The selling has been the heaviest in the Technology Sector Select (XLK), and Consumer Discretionary Select (XLY), which have both been trending lower since early October. This is in contrast to the Health Care Sector Select (XLV) and Utilities Sector Select (XLU), which are close to the early October highs. The relative performance analysis had identified these sectors as market leaders while the market was declining, so they were favored for new long positions. There are also a number of stocks that have been rising while the market was declining and some, like Pfizer (PFE), staged an expected breakout last week.
Since the negative signals in early October, it has been my view that the bull market was not over. That is still my view, based on the bullish readings from the longer term A/D analysis. Therefore, I would not advise selling on any further declines, as the stock market should be higher by the end of the year.
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