What we are thinking.
Price action suggests we have just completed a higher base in the US equity markets. The Dow Industrials completed a 28 day range, consolidating just under 20,000, while the S&P500 reflected similar price action shy of 2300. The Nasdaq Composite on the other hand, has recently been knocking out shorter bases, as it steps higher. The COMPQ has been printing higher lows and higher highs. The NYSE took 30 trading days to breakout to all time highs.
Now that the Dow Industrials pushed above the 20,000 level, we can view the top of this range (VBP band) as support. Stochastic, MACD and volume suggest we will move higher in the short term, as bearish momentum is decreasing. A quick visual check of MACD histogram reflects this sentiment, though I expect volatility will increase. In other words, we expect back and fill along the way; we don’t anticipate a Space Shuttle launch or a sudden drop.
As a side note, we added Money Flow (MFI) to the chart, an oscillator that uses both price and volume to measure buying and selling pressure. Think of it as a volume-weighted version of RSI, so it can be used similar to RSI with the added benefit of monitoring volume pressure. While the indicator offers many signals, the present condition will merit a more bullish outlook, should it turn higher over the next few days. Rather than speculate or render an opinion, we will interpret what the data suggests over the next few trading sessions.
The same thoughts are echoed in SPY. Note Money Flow bottomed prior to the breakout. Stochastic, MACD and its histogram point to higher prices in the short term. RSI is rising as well.
While the break higher is certainly weighing in the bulls favor, some traders will still question the validity of the current price level. We can dispel negativity, by watching what institutions are doing. TICK cumulative is rising, which literally means institutions are buying on the Uptick. Hint.
Finally, consider that sector catalysts are many. XLB, XLF, XLI, XLI all joined the party. Rotation was the verdict, not distribution, as many bears had speculated.
Given the preponderance of evidence we are more bullish than bearish.
Happy Trading – Vinny
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