I just wanted to share a few little items that continue to inspire my skepticism toward the ongoing rally in the S&P 500. The rally on Friday was certainly impressive. It certainly exceeded my prognostications of around 1382-4. At the same time, the underlying breadth and technical strength left me unconvinced of the bull argument.
If we look at the chart below, there are two technical indicators that fail to confirm the rally from the closing low on April 14 to the high on Friday, April 18. The first indicator the the Advance-Decline line. This indicator provides us with a glimpse at how many stocks are participating in any given market movement. We can see from this measurement that even though the S&P 500 rallied to a new short-term high, the breadth of the rally deteriorated significantly. This suggests that the price movement is losing strength.
Our second indicator of concern is the Relative Strength Indicator. I tend to look at this indicator using both a 10-day and a 14-day time period. The version displayed below is the 10-day RSI. This shows a similar situation to the Advance-Decline line. The S&P 500 rallied to new highs, but the indicator failed to confirm this movment. The difference is that the Advance-Decline line measures the breadth of a movement, while the RSI measures the rate of change of a price movement.
I would also like to note the price movement of the S&P 500 since the March 17 closing low. We saw this index rally up to April 7 before beginning any sort of meaningful pull-back. If we draw a line across the closing lows of that March 17 to April 7 rally we can see an interesting level of support/ resistance. The decline from April 7 broke down below this support level before bottoming out on April 14 and rallying into Friday. What I find interesting is the way that the S&P 500 rallied back up to this same trend-line before stalling out on Friday. It remains to be seen if there will be another test of this resistance. We may well see a rally up to the trend-line extending down from the highs of October 31 and December 10, which might also include a test of 1400.
Who knows what will happen next? The S&P 500 may indeed push higher and perhaps even test the 1400 level. What we do know for certain is that more than one perspective suggests that the strength of the recent rally has waned. Any further upside movement should be viewed with suspicion and as an opportunity to take short-term profits.
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