The bulls are celebrating a new all-time high (ATH).
The S&P 500 rallied above 4,818 on Friday – giving the index its first ATH in over two years. And there’s enough momentum to help push the S&P even higher over the next few days. So, the bulls are justified in dancing a bit right here.
But traders should be careful chasing this move because the music could stop anytime.
Take a look at this chart of the S&P 500…
The index had been chopping around between 4,700 and 4,780 for most of the past six weeks. This action formed an ascending triangle pattern on the chart.
The S&P broke out to the upside of that pattern last Thursday. And, since the height of the triangle is about 90 points, the upside target for this breakout move is about 4,880.
No wonder the bulls are dancing.
But There’s a Caution Sign…
There are some problems, though. Look at the momentum indicators at the bottom of the chart. While the S&P has rallied to a higher high, all of the momentum indicators are making lower highs.
This sort of “negative divergence” is a caution sign. It suggests the momentum behind the current rally is weak, and we may soon see a reversal to the downside.
We also have an intermediate-term sell signal from the Nasdaq and NYSE Summation Indexes. Here are those charts…
Two weeks ago, both indicators turned lower from overbought conditions. They dropped below their 9-day exponential moving averages, generating intermediate-term sell signals. The red arrows point to all the previous sell signals over the past 14 months.
Here’s how the S&P 500 behaved following those signals…
The summation index sell signals don’t often coincide with an immediate decline in the stock market. In fact, the S&P 500 often rallies a bit right after most signals.
The Bears Will Get Their Chance to Dance
But, in three of the previous four cases, the market was sharply lower within a few weeks of the sell signals. For example, following the previous sell signal in August, the S&P 500 lost about 9% in nine weeks.
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So yes… the market posted a new all-time high, and there’s probably a bit more upside to go. The bulls are entitled to take over the dance floor.
But the summation index sell signals, and the negative divergence on the daily chart of the S&P 500 suggest the bears will get their chance to dance over the next few weeks.
Best regards and good trading,
Jeff Clark
Editor, Market Minute