Stocks ended Friday on a very positive note with not only the Dow crossing back above 18,000 but with the S&P 500 and the Russell 2000 both reaching new record highs.
In case you didn’t see Wednesday’s piece, I gave three technical signs to watch for a major peak in stocks and impending bear market. Given the recent bullish thrust to new highs, I’d like to briefly recap where this puts us in the context of the long-term chart I presented, which I’ve updated below to include today’s price action (click to enlarge):
As one of our recent guests, Christopher Quigley, noted earlier this month on the show, the market was setting up the possibility of a Dow Theory sell signal, which corroborated with the narrowing and near crossover of the MACD above, which would’ve also generated a sell signal on the S&P 500 as we saw in 2000 and 2007.
The uncertainty we’ve seen in the market so far this year has been largely attributed to ongoing negotiations with Greece and fears that it could leave the euro. These fears have, for the time being, abated, which helped pushed the market higher in addition to positive developments with a Ukraine-Russia ceasefire and a possible bottom in oil prices.
Since all of these positive developments could change very quickly, it is important to visualize them in the context of market behavior and price action. With the market overbought on a long-term basis, it will be important to see whether this rally will push the relative strength index (RSI) above its prior high or lead to the same sort of divergence seen at prior tops. Again, as noted on Wednesday, such divergences can last for some time but do raise a red flag that we may be topping out.
Another trend following tool I use for monitoring the market and various sectors, which also incorporates volatility and helps to eliminate a great deal of “noise”, is a Renko chart. As StockCharts.com explains:
Invented in Japan, Renko charts ignore time and focus solely on price changes that meet a minimum requirement. In this regard, these charts are quite similar to Point & Figure charts. Instead of X-Columns and O-Columns, Renko charts use price “bricks” that represent a fixed price move.
Each brick is usually referred to as a “Renko daily buy” or a “Renko daily sell” depending on the direction of the fixed price movement and the time horizon used. Here, for example, is a Renko daily chart of the popular oil ETF, USO, which is now showing a buy signal for the first time since last summer:
The same cannot be said for gold, which is currently on a Renko daily sell:
However, gold does have a buy signal on a weekly basis:
What about the market as a whole? When we use a Renko monthly chart, the S&P 500 has yet to issue a long-term sell signal, which agrees with the technical indicators I presented on Wednesday.
