The strong rallies this week resulting in a Nasdaq Composite new high, a Dow 30 breakout out of a symmetrical triangle, and the rapid improvement in market internals in the short-term have essentially eased concerns about a double-bottom that retraced all the way down to the February low.
Chart 1: The S&P 500 broke out of the symmetrical triangle to signal another leg up to the prior highs. I believe this resolves the doubts about a potential double bottom in the market down to the February 09 lows near 2540. Observe how the CTM never fell below 20, our first solid clue that a double bottom was unlikely, since the CTM was below 20 in most previous double-bottom formations.
Market Internals Improve
My big concern this week was the divergence between market indexes and market breadth. I discussed these at some length in my appearance on Chart Watchers Live with Tom Bowley and Erin Swenlin on Thursday. However, by the end of the week the short-term market internals had improved considerably. First, the path of least resistance, which had been deeply negative across all capital classes has turned positive, a remarkable turn-around (see Chart 2). Second, my canaries, or key ETFs, that had already or were about to turn bearish on the intermediate-term have bounced/stabilized (see Chart 3). I am sensitive to the canaries on the intermediate-term, and any improvement in their disposition is most welcome, and supportive of the rally. Third, the short-term trend had turned bullish (from bearish) in the Vanguard ETFs across all styles (value/blend/growth) and market caps (Mega/Large/Mid/Small) (see Chart 4). Thus, we have multiple confirmations about the turn in the market over the short-term. Naturally, more work is needed for the other needles to turn positive.
Chart 2: The Path of Least Resistance (POLR), obtained by applying my trend-following models to all the stocks in the respective indexes, was deep in the red (bearish) on the short-term. Now, the POLR has turned bullish in the short-term, supporting the rally. The Long-term trend was bullish all along, but the depth of sell-off means the medium-term and intermediate-term POLR is still bearish. If the rally continues, then these internals will improve as well.
Chart 3: On the intermediate-term, my canaries had been very strong in late January. Then they weakened and some had entered the bearish zone. Now you can see most have turned up back in to the bullish region, with a few laggards, which is to be expected. I would love to see the canaries get back into the green box and climb back towards the top, supporting the new leg up towards old highs.
I had also been worried that the Vanguard Market Cap ETFs were bearish in the short-term. Now this week the Vanguard Capital Weighted ETFs have also turned bullish in the short-term (see Chart 4). This table is very sensitive to market action, and any weakness is immediately visible. From last September to this January, all columns were green, i.e., across all styles (value, blend, growth) and market capitalization (Mega/Large/Mid/Small cap) the ETFs were trending higher. Earlier this week, only the long-term trend was up across the board. As of Friday, you can see more green boxes have popped up, and the bullish turn in the short-term is supportive of the rally.
Chart 4: This table is very sensitive to market action, because it shows key styles (blend, value and growth) across major market cap sectors (Mega/Large/Mid/Small). For example, during a sell-off, the small cap value ETF are the first to turn. Earlier this week, only the long-term column was all green with the other three time frames being mixed. Note the improvement over the short-term, consistent with the calculations in Chart 2.
Nasdaq Makes New High
As Tom Bowley has observed, the strength in the Nasdaq over the past couple of weeks had pointed to the resilience in the market. The strength in the mega cap tech stocks and chip stocks helped the Composite make new highs before any of the other key indexes, showing where the strength lies in this market.
Chart 5: The Nasdaq Composite is the first of the major indexes to make a new highs. However, note that the 200-day Stochastic RSI has not moved above 0.8, so a little consolidation near the new highs is likely.
The market has been remarkably resilient in the face of interest rate moves and headline risk during the second leg down of the recent sell-off. The second down-leg during this sell-off retraced only about 50% to 62% (depending on the index) of the rebound, in classic Fibonacci fashion. We still have to go through the FOMC meeting (at which a rate increase is expected), so some head-line risk remains, but I believe the risk of move down to a double bottom has receded.
Chart 6: The second leg down in this sell-off retraced only about half of the rebound off the first high-intensity low. The expectation from past sell-offs was that it would have gone down to form a double-bottom.
Thank you for looking in today, and to those who tuned in to Tom and Erin's show on Thursday. I hope you have enjoyed my up-and-down journey trying to anticipate the support level for the second down-leg in the February-March price action, and will subscribe to the blog using the very quick link below.