The NYSE Composite is just shy of fresh all time highs. Additionally, it is the last index to achieve this level in 2016. The Nasdaq, Russell, DOW and S&P500 have surpassed their all time highs once again. While the overall sentiment feels overly optimistic, bullish percent is not at extremes. Remember, the markets were very pessimistic going into the election, scarcely a month ago. We also note that this indicator of optimism has peaked at higher levels.
Note the ascending channel in the chart below. This would suggest a possible continuation to the upper trend line, if all goes well, despite the gains since the election rally started. Bullish percent is still climbing (upper panel).
Investors and casual market participants usually focus on the Dow Industrials or S&P500. While this is not unusual, it is a segment of market participation compared to the NYSE Composite. My point is, there is room to the upside in this rally, despite the Dow at all time highs again this week.
Fresh all time highs would seem doable, if we considered only price action……
From a bearish perspective, it is prudent to be cautious at this time, as some measures of breadth are beginning to wane. NYA daily shows price action breaking out of a double top, while HiLo percent is moving sideways. While this can continue, it is something of a divergence worth monitoring over the next couple of weeks. A Santa Claus rally is not a guarantee.
What about breadth?
NYHL posted the largest spike in its histogram in seven years. This breadth measurement would suggest continuation, though some traders could argue this spike was due to capitulation.
The 10 year chart shows the last spike of this magnitude was the beginning of the rally in 2009 (vertical line). The market bottomed in March of 2009. Note the ascending channel. While this might seem immensely bullish, I just wanted to point out the possibilities. At a minimum, a test of all time highs would setup a double top.
Finally we have the weekly NYA Composite, which reflects the recent 5 week rally. We would anticipate more back and fill as we test all time highs. As we saw last week, we are due a respite from time to time, so do not assume we are calling for a straight shot to 11,255. We are merely looking at the possibilities.
From the bears perspective, we are due for a pullback, considering the lack of volume (below average). They also note that stochastic is overbought.
Considering the bullish argument, we see major volume by price (VBP) support right below us at 11,050. That would represent a 50% retracement into this weeks price action. A respite is possible, however RSI is rising and MACD just crossed. Price action is firmly above the 9/20ema.
Which scenario you choose it up to you. All things considered, we are cautiously optimistic going into the holidays.
Happy Trading – Vinny
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