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Disclaimer

It looks like this market has dodged yet another bullet. It sure looked like the bulls were in trouble considering the break under the prior lows, which were accompanied by confirming internals at the time. But short-term breadth and sentiment internals reached bullish levels and the bulls took command once again. Let's take a look.


When the market fell the week before last below its prior lows, the McClellan Oscillator and the 5-MA of the TRIN reached oversold extremes. A short-term oversold market measured by these market internals will result in buyers attempting to take control. Whether they could meaningfully turn prices after a break like the one seen at the time was in doubt. But by mid-week last week, option traders measured by the 5-MA of the Total Put/Call Ratio were making heavy bets that the market was headed lower. Now, while it was possible that the market was going to go lower at some point, it typically doesn't happen when these traders think so. Option traders historically have a poor track record of being on the right side of the market, so it pays to keep track of their bias by monitoring put/call ratios. With the short-term breadth and sentiment internals at these levels together, this was the bull's chance and they took it with a vengeance. They turned the market completely back to the prior highs.

What typically happens after a break of prior support that leads to lower prices is that the developing pattern will churn sideways to slightly upward while working off the short-term oversold condition, not move back to the prior high. Option traders also continue to bet that the market will advance, not bet that it will continue the prior fall. At this point, most markets are back to their prior highs and some have actually surpassed their highs. This puts the prior short-term sell signal on hold and places the market in a neutral mode. That being said, the odds of seeing some selling at the old highs are high.

When a market recovers as this one did, it's key to see confirmation of that price movement in the internals. One the internals gauges we can use for this is the New High minus New Lows. As you can see in the above chart, the New High - New Lows did move back to the prior bullish level area that has been confirming this bull market. Had this internal gauge stayed negative or near the zero level while the market moved higher, it would have been a bearish sign. So while the odds are high that we will see selling soon just because the prior highs are in this area, this confirmation is positive intermediate-term.

One of the sectors that helped the markets move higher was the Semiconductor Index (SOX). This index has been lagging in this bull market, but this may be the point where it begins to outperform. What happens at the prior highs that formed in May will be key. If the SOX can close above those highs from May, the odds of continuing highs will increase. This would be bullish for the broader markets and especially for the NASDAQ 100 index, since the Semiconductor stocks are a large part of that index. The NASDAQ market is nowhere near its prior highs, as the S&P 500 is and one of the reasons for that is the lagging Semiconductors. Watch them!

On a less positive note, Crude Oil closed above its recent range that had been containing it. The markets may be getting used to the higher price of Oil since it ignored this recent breakout. Even the Transportation Index (not shown), which typically is very negatively influenced by rising oil prices rallied. The Transports did not rally back to the prior highs as other indices did though. If it does not move back to its highs and markets move to new highs, it will become a concern for the bullish side. Keep and eye in Crude Oil and the Transports.

There are other positives and negatives for this market, but no time to review all of them. For now, the market has sidestepped the bear's claw once again. In the short-term, the market is likely to have difficulty at its prior highs and trading range for a time would not be surprising at all. Intermediate-term, nothing has changed; it's still a bull market.

Until next time, enjoy the markets!

 

 

DISCLAIMER: Information for the stock observations was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the stock observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Affiliates of Pristine.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the strategies described above.

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