It has been a good week for the market as it has avoided a "sell the news" reaction to a questionable China deal and then reacted favorably to earnings reports from major banks. Small-caps have outperformed with a gain close to 2.5%, which helped to produce improved breadth and better stock picking.
Although the indices are a little overbought and heading into some overhead, conditions are in place for further upside. Some consolidation, or backing-and-filling, would help to build the foundation for a possible breakout move.
Whether the technical patterns continue to develop in a productive way will largely be determined by the mood of the market as earnings season picks up steam in the next two weeks, and whether there are macro headlines about trade, the economy or the Fed that produce a response.
What has allowed stocking picking to improve this week is that the action is no longer being driven by major headlines -- and China trade, in particular. Market players seem to have grown tired of dancing around to every piece of news and are ignoring trade issues as well as the growing political battle in Washington.
Today is option expiry, which will impact volume and cause some "pinning" action to take place so the price action is going to be artificially driven to some extent. What is important after the improved action is that the selling not accelerate too much. There is some solid support at 2963 of the S&P 500, so there is plenty of room for backing-and-filling, but if recent daily lows are undercut too much that is a problem.
One other issue that is important to watch is the rotational action. Software and cloud names have seen another bout of outflows, but biotechnology, retail and a few other groups have seen inflows. The sector movement will be particularly important, especially the FAANG names as Microsoft (MSFT) reports next week.
There are a number of Fed members speaking today and the debate over one or two rate cuts this year will pick up some steam, but the market seems content that the Fed is dovish and supportive of the market.
I'm expecting some consolidation today, which will help individual charts to develop, but will stay selective with entry points. There is enough improved action in individual stocks to entice me to put some capital to work, but my cash balance remains quite high as I'm moving slowly and incrementally.