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What’s Up With The market?

spx 2018-06-11

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A couple of weeks ago, I wrote that the market had a 60% chance of moving higher based upon the fact that it had cleared the blue downward sloping trend line and had broken above the May R1 resistance level. I noted that we could likely retest that downward sloping trend line and that if we then successfully moved back above the May R1 resistance level, we would likely see our next major stop at a bit above the 2800 level on the S&P 500 Index.
 
Above, I have updated the original graph to extend the two blue trend lines with orange lines and added an orange arrow at the point where the market did in fact retest the trend before a sustained move higher. I have also circled the area where we have broken above the June R1 resistance level. My Rule of Three states that now that we have broken above June’s R1, we need to stay above it for three days or three percentage points. Once that happens, the June R1 becomes a support level, just as the May R1 is now a support level since we have sustained a move above it for at least three days.
 
So, what’s next?
 
1. Let’s start at the bottom of the image in the panel that represents our Trend Analysis. As I noted in our previous blog post, we want to see the blue 50-day moving average move above the pink 100-day moving average. You can see that the blue line has curled upward and could move above the pink line in coming days. When that happens, you have a very strong up-trend in place with the 50-day above the 100-day above the 200-day above the 250-day moving average.
 
That stacking of the trend lines in order from short-term to long-term means that in all of the short-term to long-term time frames, the market is trending higher. Once a trend is in place, the market tends to follow that trend as the various trend following investment strategies add more money to be invested. It also means that investors that are on the sidelines jump in and add money to the market as it appears to be investor friendly.
 
2. Now, let’s move up one panel on the image to review our Sentiment Analysis. As I noted in our previous blog post, we see positive sentiment with (a) Cash Flow being consistently positive and rising and (b) Momentum moving into positive territory and rising. Since then, cash flow has continued to be strong (the orange area graph) showing money moving into the market, and momentum has gotten stronger (the black and red line graph) with both lines in positive territory and rising, and the black line consistently above the red line.
 
3. Finally, in the very top panel we have our Short-Term Relative Strength Analysis. This is the only worrisome item on the image. You can see that the line have moved above the upper threshold reading, which typically means that in the near-term, the price action has gotten ahead of itself and we are due for either a couple of down days or a couple of choppy sideways days until the price action gets less giddy.
 
So, when we combine the price movement of the primary graph and its need to stay above the June R1 resistance level with the relative strength line showing a need for the market to cool down a bit, my best guess is that we do not get our our three day rule confirmed and we drop back below the June R1 resistance level.
 
However, given the strong Trend and Sentiment that are in place, this will be a buying opportunity for those that have cash to invest, and they will add it to the market and push us back above the June R1 resistance.
 
So, lets give this a 65/35 chance of seeing ultimately higher prices where we hit 2,825 on the S&P 500 Index before we see another retest of the blue/orange downward sloping trendline.
 
Will we make it all the way to 2,875-ish all-time high? Stay tuned to the blog and I will keep you updated on the progress the market is making.

—Mark