Monday, May 26, 2014

Daily Market Commentary: S&P Breakout

Tech indices had got the ball rolling last week (helped in large part by the semiconductor index), and the S&P got its taste with a challenge on the earlier 'bull trap' which is all but negated. The MACD has flattened, so the 'buy' trigger does carry a high risk of whipsaw, but the S&P's On-Balance-Volume trend again points to good accumulation, even if individual volume days remain typically seasonally light. Where there might be a shift for the summer is in a swing back to hard hit Small Caps.


Speaking of Small Caps, the Russell 2000 had a solid Friday, pushing through both 200-day and 20-day MA in a manner which suggests short covering.  The February-May bottom as an "Adam-and-Eve" look to it, which suggests a challenge of 1,210, perhaps by summer's end, with opportunities to trade upside breaks of recent swing highs at 1,135 and 1,155. Technicals remain in recovery mode having just climbed out of an oversold state.


The Tech indices have strength in the semiconductor index to thank.  Another breakout attempt in the SOX looks to be gathering steam.


This strength has fed through to the Nasdaq 100.  Note the 'Golden Cross' between 20-day and 50-day MA, as the index puts some distance from the broadening wedge.


There has also been a breakout in the consolidation for the Nasdaq, with a push above the 50-day MA too. Again, it's a relatively low key break; an effective break from within a base, but it might offer bulls something to trade (for junior traders stuck in Wall Street) during the summer before the headline breakouts (new all-time highs) returns.


Nasdaq breadth, the Percentage of Nasdaq Stocks above the 50-day MA in particular, looks to be building a decent swing low, even if not all breadth metrics have reached an oversold state typical of a strong swing low (as happened in the summer of 2010, 2011 and 2012). Should the Nasdaq take another turn lower, and breadth metrics were to fall into the green zone highlighted in the following chart, then I would view that as a very strong buying opportunity.


Bulls hold the advantage with the Russell 2000 looking more favorable for bulls than bears. Value buyers may want to take a punt here, with momentum players perhaps looking to the semiconductors/Nasdaq for joy. The S&P is a trickier beast as action remains tight despite the bullish breakout.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com.
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