Will the trading range of 3,800-3,900 in the S&P 500 finally crack this week?
Last week with the S&P at 3,808, I wanted to break 3,800 to see what was down there. I was convinced that we'd have fewer new lows, that breadth would show a positive divergence and the Daily Sentiment Index (DSI) for Nasdaq, which was at 12 would fall to single digits. So, of course we rallied right to 3,900 instead. I don't believe we have the same test at 3,900 that we had at 3,800.
We have a test, but it's a different sort of test. It's not a test of the indicators, but rather of resistance on the charts.
There is a lot of resistance on the S&P 500 starting not far overhead. Depending on how thick your pencil is, we can call it 3,930, but it goes all the way up to 4,100. And there is no similar test because the number of stocks making new highs on the New York Stock Exchange is already at 79. The prior peak reading is just over 100 when the S&P was at 4,100 so we have approximately 200 points of rallying in the S&P to gain another 20-ish new highs to erase a negative divergence that would develop. Perhaps I am wrong, but I believe if we rallied to 4,100 there would be more than 100 new highs.
So it's really a matter of whether or not the resistance overhead will stop the rally since I don't believe the market internals are the issue right now.
We've already discussed the Bank Index and the resistance I see overhead in that $107 area. With this group reporting their earnings later this week, that might be the first test. I think that $107 area stops the rally in banks.
But there is also energy. You can see Energy Select Sector (XLE) is making its second trip up to the resistance it left from November's mini top. Here we need to see if the rally can cross the downtrend line it stopped at Friday. Oh, there is still plenty of resistance all the way up to the November peak but crossing that downtrend line is the first test.
A week ago we looked at the charts of PowerShares QQQ Trust (QQQ) and Invesco Nasdaq Next Gen 100 ETF (QQQJ) where I noted the Junior names' outperformance in December. QQQJ will have its test around $25-$26.
The big cap QQQs have a mini-test at $270 but their real test comes at $280, if they can get there.
Away from stocks, there is a big test for bonds. The yield on the 10-Year Treasury is sitting right at an uptrend line. I have no strong view as to whether it breaks or not but I do believe if it does break then 3.4% will not break. I think that level holds for now.
Then there is the U.S. dollar which I have thought -- for at least a month now -- that it would not break this support area it has sat in for five weeks. I did however believe it would rally more than it has (I had thought an oversold rally to 106-108 was due). So sure if it breaks there is support at 102 but would then break the flat line and the uptrend line at the same time.
I am still not convinced the dollar is set for a new leg down now, but I will be watching this support area with great interest.
Let me finish up by noting that the Daily Sentiment Index for the CBOE Volatility Index is back to 15. So if stocks rally much more from here that metric is going to get too low. Don't get too complacent.
