All Indexes Break Through Major Resistance on Continued Strength

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Let us again begin things with the broad economic picture. Last week we saw continued positive action from the Leading Economic Indicator (LEI) front. A new cycle high was hit last week.  The stock market and economic trends continue to move higher. Regional Purchasing Manager Index (PMI) data in March has been strong. Both the Philly Fed and Empire Manufacturing Index are still trending higher.

All areas of the LEIs were strong last week. Housing data was particularly strong. Also, growth expectations held by investors continues to strengthen. When people view growth as improving they are willing to take on more risk.  This greater appetite for risk is reflected in higher equity prices. Labor related news has been improving for the past several months. After the strong run in the market we need to be sensitive to the rate of change, the dreaded second derivative, not just the absolute numbers released. With the market now exceeding 2008 levels any disappointment will not be viewed favorably.

Now for the technical take. The long term picture remains attractive.  The reading for stocks in favorable technical condition in both the S&P 500 and the broader markets remains 84%. With over 80% of the stocks I can choose from either basing or advancing I must remain constructive on the market.

Over the past few weeks I have talked about some negative divergences. Some negatives were eliminated last week: The daily advance-decline (A-D) line hit a new all-time high that was matched by the weekly and common stock only A-D lines. The last two readings mentioned had not moved to new highs. The action in these readings point to continued strength in the market.

The other negative divergence that had me concerned was the failure of the Russell small cap index to exceed 834. Today, the Russell closed at 837 showing that resistance has been overcome on all the major indexes.

Here are the support levels for the S&P 500, Dow, NASDAQ and Russell 2000; 1389/13,160/3023/820. Based on current strength, any pullback in the market should remain controlled. So, based on the drill, I must remain constructive on the market. Over 80% of stocks are technically attractive and the LEIs continue to remain strong.  The support levels I have given you each week have continued to be increased. The weekly support levels have acted like a trailing stop loss on the entire market.

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About Thomas J Smith CFA