Trend bullish – Despite stretched momentum, long positions remain correct; Pullbacks from near-term overbought levels next week likely prove minor before gains into late June.
SPX has now risen for six straight days, which has occurred less than 10 times in the last five years. While our choppiness from March-May created an environment that makes many rush to sell into breakouts, this doesn’t seem like the correct thing to do technically.
Short-term overbought conditions during a parabolic move are far different than an overbought state caused by a rapid move within a consolidation, and this is an important distinction.
Many of the statisticians on Financial Twitter (FinTwit) have discussed how trading “X” % above the 200-day moving average makes markets overbought and higher risk to buy. I typically refrain from “blanket statistical type data” as it fails to take into account cycles, sentiment, DeMark exhaustion, not to mention market structure.
In this case, while QQQ 0.97% and SPX are certainly overbought, there hasn’t been any technical reason to sell regarding trend failure, which is the #1 methodology to embrace regarding managing signs of peaking out.
However, when combining cycle analysis (which I’ll share a bit today) along with DeMark indicator synergy, sentiment, and sector rotation clues, I believe the lack of uniform warning signs continues to warrant long exposure while not paying too much attention to overbought conditions.
DJIA, shown below, has just broken out of its consolidation which began late last year and directly illustrates the ongoing broadening out of this rally, which so many doubted two months ago.
This pattern resembles a reverse Head and Shoulders pattern and is quite bullish technically speaking. Stocks like CSCO -0.40% , IBM 1.17% , MSFT 0.51% , AXP 0.92% , CAT -0.40% and INTC 0.68% are all up more than 10% in the last month. Only MSFT qualifies as a possible “FANG”-like holding, and this latter stock has led all other DJIA names outside of CRM -0.42% for Year-to-Date (YTD) performance, higher by over 45%
While MSFT might face some stalling out near all-time highs, other stocks within the DJIA are expected to play catchup given this week’s breakout. Names like CVX 0.30% , UNH, AMGN -0.08% , MMM 0.88% , and WBA are all down more than 10% and could certainly use some mean reversion. Healthcare looks close to stabilizing, but as of now has not given an “all-clear” for turning up sharply as a sector in relative performance to SPX. That might be delayed another 2-3 weeks.
Bottom line, this DJIA breakout is considered bullish, and I do feel that a rally back to new all-time highs is likely for “the Dow” this year.
Daily cycle shows SPX likely remains higher until late June, and potential for strength into mid-July
The SPX cycle composite I employ shows the potential for weakness starting in late June to mid-July into mid-August before another runup.
When utilizing the strongest short-term cycles (shown below), which utilize only the 63 and 80 day trading day cycles, this seems to indicate a peak by July expiration.
Until there is more meaningful evidence of SPX breaking 4200, which would structurally suggest a larger pullback might be upon us, I feel its early to get too defensive.
Furthermore, the lack of weekly DeMark exhaustion likely means that near-term weakness should be buyable for additional strength into next month. I’ll certainly monitor if this changes, (and will show the longer-term cycle tomorrow) but for now, the shorter-term cycles still show markets likely holding up a bit longer (despite the overbought conditions).
Natural Gas might finally be making its move
Natural gas finally began to show some strength on Wednesday following EIA reports that domestic inventories rose less than expected last week. This added to woes about a recent decline in production levels caused by pipeline outages.
Technically, Natural gas has been surging in Europe and just began to play catchup in the US this past week. While the weaker US Dollar might be a tailwind for gains, volume spiked on Thursday’s bullish news to the highest levels in two months.
Thursday’s rally might not officially look like a breakout, but I expect this is imminent given the Dollar decline coupled with the bullish volume characteristics.
Above $2.68 in the generic contract of Henry Hub Natural Gas should help this move sharply higher up to $4.75 without too much trouble technically. Overall, I feel a rally has begun and like owning Natural gas via ETF’s like UNG for a rally into August before this starts to settle.
United Health (UNH) has recouped this week’s breakdown
Finally, a couple quick comments on UNH, which violated prior lows early in the week but has quickly recouped this support as of Thursday’s close.
This looks like a failed breakdown technically, and I like holding UNH with support at $445 with movement above $472 being even more bullish for the possibility of a larger rally getting underway.
Overall, this stock remains in consolidation, and will require a move back over $520 to truly jumpstart a larger rally (which for now is difficult to forecast) However, I expect that the ability to have recouped this early week’s breakdown is indeed a technical positive.
Furthermore, given that UNH is a laggard in the DJIA, and DJIA just broke out of its massive consolidation, this is another bullish reason to expect some mean reversion higher in the stock in the weeks ahead, particularly if Healthcare begins to rally.
