It has been some time since I’ve written for Financial Sense, and I felt like the current market setup warrants some technical work that may be able to help our podcast listeners as well as our readers make sense of things. I’d like to just take a look at the market from the top down, looking at the major equity indices that were developed to give us a sense of direction for a broad basket of companies. I believe the weight of the evidence when looking down at all of the indices from 30,000 feet up will help to see the forest from the trees.
Momentum indicators for the Dow Jones Industrial Average suggest that we have been in a consolidation since the February rally. That consolidation is taking the shape of a symmetrical triangle. Usually, these types of triangles have 5 movements or waves. The probabilities are high that this type of triangle is a continuation pattern and not a top. Since the previous move before the pattern was a rise in February, it is likely that when this consolidation breaks, it will be to the upside. Trend support and rising long-term moving averages also suggest that the long-term trend will reassert itself soon, increasing the probability for such a move higher.
The Dow Jones Transport Index has been one of the weakest indices in the U.S. While other indices still show long-term uptrends, the Transport Index has undergone a much longer consolidation with no sign of higher highs and/or higher lows. While the index broke below the 200-day average briefly, a new downtrend has not been established. The Transport index remains in a trading range and has yet to confirm the new highs for the Industrials registered in March. Short-term, things are improving with a bottom on the charts with a price target near 9100. The Transports will need to close above 9217 by 1-3% to be considered a breakout. If the index can continue to rally and break above an RSI of 60, it might get that chance.
The S&P 500 looks similar to the Dow Jones Industrial Average; both consist of large multi-national companies dealing with currency issues given the strong dollar. The intermediate-term consolidation looks fairly complete to me and given it is within a long-term uptrend, I believe the probabilities are high that we should see a breakout soon. The recent correction last week caused a whipsaw below the 50-day moving average, which is bullish.
Recently I had read a technical newsletter that was using the NYSE Composite as an example of why the market is not working. I do see an index (mixed with BOND ETFs and other alternatives besides operational companies) that has struggled to reach new highs for a year; however, the developments from October I think are bullish including a series of higher lows, which are a sign that a new bullish trend is trying to confirm and is awaiting confirmation with a break to new highs. An attempt was made last week to do just that and failed. Today represents round two. A breakout is confirmed if it is between 1-3% according to traditional technical analysis but we can also look at other signs like volume and momentum in this case. 60 has been a location of resistance for the RSI momentum indicator. A break above 60 towards more overbought territory in combination with a breakout in price will serve as confirmation that a bullish trend is being confirmed. We can also calculate an expected target for the breakout due to the formation of a head and shoulder continuation pattern, which suggests a target of approximately 12,300.
While the NYSE Composite is a mix of non-operational companies like ETFs, REITS, etc, Stockcharts.com has a common stock only advance-decline line. This shows that with an uptrend and a break to new highs, the breadth of stocks advancing is outpacing the list of declining issues which is a positive sign for the NYSE and the market.
The Nasdaq Composite, full of tech and biotech companies, is trending higher. It too has undergone a consolidation after the February rally, but that consolidation has been well above 50% of the February move, which is bullish for a consolidation. Today the close was able to reach a new 52-week high but confirmation will take a few more points with a 1-3% move above 5026. The Nasdaq has been one of the better performers thus far in 2015.
The Russell 2000 Small Cap weighted index broke out to new 52-week highs late February, completing a long one-year consolidation for small cap stocks. The driver behind this performance has been largely currency related as well as growth related. Investors continue to look for growth and have been searching for it in smaller companies. The other factor here is that many of the smaller companies listed in the Russell 2000 are US domestic-only companies with very little foreign exposure. Here in the index we see bullish momentum and a bullish trend. Currently, the trend is near the channel support, which has clearly been supportive of any pullbacks in the past few weeks. This index shows no sign of trend weakness yet.
Summary
The U.S. equity market has clearly undergone a consolidation for some time. In some areas, we see a longer consolidation than in others; however, many of the equity indices are already showing well-established uptrends that began at the October low. When you take a step back and view the secular trend on these charts, the October correction now appears to have only been noise in the ongoing secular trend. The weight of the evidence suggests that equity investors should have a bullish bias until trendline supports are violated. Thus far, they’re doing their job and will likely continue to put pressure on the recent consolidation ranges we have grown comfortable with over the past couple of months with an upward bias.
If however the dollar remains strong and economic data is strong, Fed officials may have to reconsider recent dovish statements made by Atlanta Federal Reserve President Dennis Lockhart and Minneapolis Fed President Narayana Kocherlakota about waiting longer. But given the latest jobs data and the weaker flash PMI numbers today from China and others, I’m assuming it will take two to three strong months of economic releases before the Fed again talks about raising rates. That may mean that the market is adjusting to a later rate lift-off date now.
