Wall Street s comeback rings a little hollow

Updated to correct date on which Dow Jones Composite Average entered long-term channel.

Wall Street was still well on its way to a full suite of major indices posting their first net gains for the year on Monday, even as they slipped a little from Friday’s close.

But, just like late last year, the dubious internal strength of many of these markets and inconsistent momentum were flies in the ointment that couldn’t be ignored.

No fear

The S&P 500 edged into positive territory for 2016 on Friday, helped by gains in the healthcare and financial sectors which had been notable laggards.

The broadest US market of the biggest US firms was ticking back at the time of writing, but was still more than 13% higher than lows seen in February, a remarkable turnaround.

The trailing industrial sectors had joined a broad-based rally that was spurred by the more tempered view offered from the Fed on interest rates last week.

As well, stock volatility has pulled back sharply; again the Fed’s announcements played a part.

The CBOE Volatility Index, AKA the so-called ‘fear index’ fell 4.8% to 13.75 on Friday, its lowest point since early November, and was barely up from that low at last check.

Advance declines

Doubts about the sustainability of US stocks’ pick up though, come in after a closer look at the internal strength of the broad US market.

New York Stock Exchange’s Advance/Decline (NYSE A/D) Line—the number of advancing stocks less the number of declining stocks—for instance has been trending unmistakeably lower since January.

DAILY CHART: S&P 500 INDEX vs. NYSE ADVANCE / DECLINE LINE

Please click image to enlarge

NY differs

In similar fashion to the pattern observed late in 2015, the gauge suggests the number of stocks participating in the US equities rally is weakening.

We also observe a bearish-looking flag on the NYSE A/D, followed by a steep fall post culmination.

At the same time, since trading at its lowest point in 2016 during February, the benchmark S&P 500 index (narrower than the NYSE’s 2,800 shares) has been recouping, rising 13% over 25 trading days.

It was testing a potential descending trend from November highs though, at the time of writing, whilst SPX’s near-term sentiment gauge, Slow Stochastic indicator, was trading beyond its ‘overbought’ ‘80’ reading.

Certainly though, the index has demonstrated significant recent technical strength.

It conquered its 200-day moving average (blue) on 16th March and remains above visible resistance/support (pink rectangle) backed by 61.8% (1999.42) of the November-February decline.

Composite fractures

Perhaps it might be safer to conclude that technical strength could well continue to contradict more granular trends of the market for some time.

That view was backed by an even narrower index of the biggest US industrial names (65) listed on the Dow Jones Composite Average. (DJCA)

DJCA includes all stocks in three major Dow Jones Averages: Industrials, Transports, and Utilities.

In essence, a strong DJC can confirm strength in all three, reassure on the wider underlying tone, or warn that what may seem like promising internals warrant a closer look.

MONTHLY CHART: DOW JONES COMPOSITE AVERAGE

Please click image to enlarge

Close to the edge

The Dow Composite’s monthly chart has become more constructive within the rising channel it entered in 2008.

DJCA sold off 19% from its Dec 2014 peak to its Jan 2016 low, but reclaimed the upside by breaking above its 12-month and 36-month average trends this month.

The robustness corroborated poor follow-through in two preceding months which saw the index test the lower bound of the channel before rejecting a breakdown.

A shorter downward channel, which we can interpret as a bullish flag, also played out in practice as per theory.

All that said, DJC was once again within reach of its highest ever trading levels as this article was about to go online.

The index was a little over 300 points away from 6584 which was touched on the last day of December 2014. (DJCA’s closing record high was at 6473.6 on the same day.)

Investors may therefore be able to get a tighter handle on the sustainability of the current US stock rebound as leaders of the industrial sectors again approach the above peaks.

Wall Street’s trend line news

Likewise, traders of City Index’s Wall Street Daily Funded Trade (DFT) may need to see the index remain close to or better still, break above a rising trend that has limited its gains since 18th February.

HALF-HOURLY CHART: WALL STREET DFT

Please click image to enlarge

Below the red line

On the upside, the next major target would be an imperfect ‘double top’ of 17977.9 on 3rd November and 17964 on 4th November.

Early warning that any part of the current market structure that we’ve outlined above may be creaking, may also be shown by Wall Street DFT’s 3-day exponential moving average (144 half hours).

The trade looked below that line two Thursdays ago.

It then found support on 76.4% (16821.7) of the fall from the 5th January ‘failure high’.

(100%: 17247.5 on 5th Jan; 0%: c.15445 low on 20th Jan.)

17247.5 / 16821.7 should again provide support in the event that current stretched and inverting momentum presages more than ordinary consolidation within this time frame (see blue shading at tip of Slow Stochastic indicator).

If Wall Street DFT falls through these levels and even breaks the bottom of a channel in place since 11th Feb, whilst the rally of US stock components gets even more rarefied, it will be a much less ambiguous message about the risk of another significant correction.