From the beginning of 2017 to now, we’ve seen an abundance of optimism enter all sectors of the US equity markets, from large cap Dow stocks to small cap Russell. Since the “Trump Rally” of late 2016 to present day, a period of consolidation transpired in which the 20,000 threshold on the Dow Jones was probed numerous times. The price has successfully pierced that barrier and the market action of late is one of consolidation as the daily candles shown in the pink ellipse area below shows.
Here’s a close up view of the action on the right side of the chart:
charts courtesy of stockcharts.com
We note how often the index closes near the mid range of the day which indicates uncertainty. The purple descending line on the RSI indicator also shows a declining rate of closing momentum as well. We can make the case that none of this is necessarily bearish since prices are well above the 50 and 200 day moving averages shown on the chart firmly placing the market in bull mode by definition. The Aroon indicator also shows positive closing trends. Other indicators we follow such as breadth, number of new highs to new lows and SCTR ratings of influential issues still points to a robust market. Historically, round numbers also become platforms of support once they are overcome as resistance.
With prices so far above the moving averages, it is likely that prices will churn for a while and I expect that the 50 day will be tested. We’ve been reluctant to commit heavily into new long positions over the past month, except for special situations such as Technology and base metals which exhibited superior relative strength. A couple of Doji star candles have made appearances over the last few sessions of trading in the Dow which gives a hint that weakness will happen soon. We must say however, that the longer the market can hold here without a lot of internal deterioration, the more likely it is that the eventual resolution of this sideways range will be to the upside. A minor correction would not be surprising. We continue to think that technology and financials will lead higher and we will have specific comments in another post.