Equity trends remain bullish from early August but structurally are growing closer to upside targets that might produce a stalling out into next week. While Wednesday’s post-election surge produced a multitude of breakouts of various triangle patterns on numerous stocks and indices, the lack of broad-based strength was a bit troublesome for today into tomorrow’s FOMC meeting. The US Dollar and US Treasury yield both screamed higher but should be vulnerable to weakness post-FOMC meeting, and peaks in both look near. Overall, while it looks early to attempt to fade a one-day rip back to new all-time highs for Equity indices, it’s worth just keeping a close eye on momentum and breadth into next week as Equities near the 3-year anniversary of their all-time highs from 2021. SPX is now near its 5950 level, and it’s thought that 6,000 should be effective resistance. QQQ has exceeded its prior highs and could move to 510 into early next week before finding a new level of resistance.
I discussed these two points earlier this week in my reports:
- My expectation is for a rally post-election, but one which disappoints in the degree of broad-based strength over the next week.
- Evidence of the gap at SPX-5811 being filled and exceeded would then point towards a move to 5950 in all likelihood.
Wednesday’s post-election breakout is certainly something to cheer with regard to NASDAQ and DJ Transportation Avg. pushing back to new all-time highs to eliminate the divergence across the US Equity landscape. Additionally, the breakout in Small caps (per the IWM 0.27% triangle breakout) is also quite constructive, and both Mid-caps and Small caps outperformed Large Caps from a style perspective post-election.
Near-term, I expect Wednesday’s breakout might need to be consolidated on Thursday post rally, but the direction between now into mid-November should be positive. Russell 2000 in particular looks set to test its own all-time highs in the days ahead, and the mean reversion higher in Transports certainly helps to eliminate some of the negativity regards to Dow Theory divergences.
Overall, whether Wednesday’s rally pulls back to fill the gap or pushes up to 6,000, the short-term window of upside doesn’t appear as attractive from a risk/reward perspective. However, until there’s ample reason to try to fight this rally, I certainly still view today’s advance as a structural positive. I’m hopeful that breadth starts to broaden out in the days ahead, and I’m very keen on keeping risk “close to the vest” after an 800-point SPX rally from early August lows just three months ago.
Consolidation of this entire three-month move would bring about a much more appealing risk/reward situation for buying dips into year-end, and I am still very much on board with the idea of an intermediate-term rally carrying higher in the first half of 2025. The next two weeks should prove pivotal, and despite many investors feeling the worst is behind them, I would implore most people to watch the market carefully and keep a close eye on sentiment, breadth, and the formation of any DeMark-based exhaustion.
S&P 500 Index
Russell 2000 ETF breakout should lead back to all-time highs
Today’s gap higher in IWM 0.27% proved to be very constructive after price surpassed all former highs as part of the three-month triangle pattern going back since July.
This happened much more quickly than most anticipated but does set up for an eventual test of all-time highs near $244 in IWM.
Patterns of this sort are quite positive, but how to play them for those with short-term timeframes are tricky. Ideally, one should be long Small-caps and simply use dips, if/when they occur, as a chance to buy more.
I do suspect that rallying into $244 could line up with SPX hitting 6k and might prove to be a short-term resistance level.
iShares Russell 2000 ETF
DJ Transportation has also broken out back to new highs
Transports have finally engineered the much-anticipated breakout back to new highs, (based on DJ Transportation Avg.) and this happened today along with the NASDAQ.
This promptly ended the divergence, which had kept Transports at bay while Industrials and Utilities moved back to the new high territory.
While this is certainly a bullish intermediate-term development, I’m uncertain that this breakout means Transports and/or the broader market should push back to new highs uninterrupted into year-end.
In the next 1-2 days, any consolidation of today’s 5% move should be buyable technically with the thought of a push higher up to $19.2k and possibly $21k.
Railroad stocks and Trucking names certainly have begun to play catchup as a result of this move which previously had just centered on Airline strength. Overall, I like the Transports, and I feel this will aid Industrials strength into next Spring. At present, I would consider any dip in price in the next week as making Transportation issues more attractive.
Dow Jones Transportation Average Index
Financials acceleration is also something to watch
The upside acceleration in Financials is also a very bullish development given that Financials represents the 3rd largest sector within SPX.
Both Equal-weighted Financials and Sector SPDR ETF (XLF -1.51% ) both jumped approximately 6% following the Trump victory, and the large low to high range typically suggests a good likelihood of additional upside progress.
Weekly XLF -1.51% charts show Wednesday’s acceleration, which makes this sector seem still attractive technically on an absolute basis, with no evidence of weekly exhaustion despite a stellar move.
Relative charts (not shown) of XLF to SPY 0.28% appear to show 2-3 weeks of possible outperformance by Financials before facing meaningful resistance.
Technically, my target on XLF is $53.50, approximating a 100% alternative retracement projection of the initial rally from 2020 into 2022 when projected from October 2022 lows.
Thereafter, I expect Financials might require consolidation, but at present, XLF remains remarkably healthy, technically speaking.
S&P 500 Financials Sector SPDR * XLF
