The S&P 500 (SPY) and the Small-caps Russell 2000 (IWM) linger near all-time highs. This looks like a great setup for a rally past resistance and into higher territory. However, there are two potential problems to consider.
The first is the Transportation sector (IYT), which has broken its 50-day moving average and is now looking to confirm a cautionary phase, with a second daily close under its major moving average. In the past, we have watched IYT as an underlying market strength indicator. Additionally, should IYT continue lower, it could be signaling a weakening market picture. If the market continues to pause or stall out at these pivotal breakout levels, investors/traders could grow restless and begin to sell if they perceive weakening market momentum.
The second problem comes from Thursday's Consumer Price Index report, along with Jobless claims. Both reports will be released at 8:30 ET and could either boost or hinder bullish price action.
On the brighter side, we are continuing to see signs of economic improvement as U.S wholesalers sales rose +0.8% in April. Additionally, in May, inventories of wholesale stock were also up +0.8%. This shows that certain supply chains are beginning to strengthen as the economy continues to pick up the pace.
With that said, we could be seeing a divergence of investors sentiment in the Transportation sector and the general market. This means we should stay cautious if IYT continues to break down and watch how it affects the small-cap Index (IWM), along with the S&P 500.
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- S&P 500 (SPY): 422.82 needs to clear and hold.
- Russell 2000 (IWM): 234.53 high to clear.
- Dow (DIA): 351 resistance. 342.43 support.
- Nasdaq (QQQ): 338.19 resistance area.
- KRE (Regional Banks): Broke 70.00. Next support 68.80.
- SMH (Semiconductors): 244.81 support. 258.59 resistance.
- IYT (Transportation): Broke 268.53 the 50-DMA.
- IBB (Biotechnology): 159.30 new support to hold.
- XRT (Retail): Needs to clear 96.27 and stay over.
Assistant Director of Trading Research and Education