With the change of year comes our change of stance; go figure. Since the August break we’ve held a bearish posture based on associated underlying risk; both fundamentally and technically. Nevertheless, the longer-term downtrend has not continued and has begun to show signs of technical strength. This, due to shifts on both the broader and secondary indices, has caused us to transition back to a “Market Neutral” outlook.
About one week ago, during the midst of the holiday season, we began to notice formations in some individual stocks which portrayed the possibility of a bottoming formation. (Volume & Stochastic Divergent Double Bottoms) When this occurs, on more than just a few occasions, a good technician needs to take notice and become more aware of the surroundings. From there, January 3rd, started the year off with a bang (kinda) – 1.5% move with below average volume. Nevertheless, the three eldest sisters (DJIA, SPX & NDX) all crossed above technical downtrends and horizontal resistance points – only to leave the youngest (RUS) trailing below its 200-DMA.
Looking at the weekly SPX graph we can plainly see the break above the recent downtrend. This move has positioned the SPX back into the “2011 Channel of Indecision.” This, for all intents and purposes, should allow a greater probability of retesting the Channel highs (~1,350). Henceforth we’ll be looking for further signs of strength (and or weakness) to add to the weight of evidence and probability stacking to help determine if this move has longevity or is based solely on New Year “Hope.”
Evaluate the three most important secondary indices for further clues of internal strength (Transports, Semiconductors & Banking).
We hope this helps.