The MSCI EAFE Index chart caught my attention because it recorded a bullish upside breakout, is not overbought on a weekly basis, and, from a contrarian perspective, I have seen minimal discussion about it.

With news of strong economic data coming out of China and the U.S., it appears confidence in the “economic growth narrative” is gaining traction. Consequently, a pro-cyclical rally is occurring.

S&P 500 – The short-term trend remains up. The 50-DMA and the 2722 low represent key short-term support levels. Russell 2000 broke down on a short-term basis. This implies Wall Street may be becoming more risk averse.

Mean reversion is a theory used in finance that suggests that asset prices and historical returns eventually return to the long-run mean or average level of the entire data set.

The U.S. market is outperforming the rest of the world based on a long-term relative strength trend. However, some shorter-term relative strength trends favor overseas markets. We’re watching for longer-term signs of a shift toward international.

With the exception of sentiment (more below), and despite the huge rally since late December 2018, the underlying technical condition of the domestic equity market is getting better, not worse.

The S&P 500 appears confined between a flat 200-DMA and downtrend line (resistance) and rising 50-DMA (support). How the SPX handles these initial tactical levels will be an important short-term guidepost.

I still believe that the probability favors a partial retest of the 12/24/18 low, not an undercut low or a full retest of the 12/24/18 low.

Despite disappointing corporate reports yesterday, the rally off the 12/24/18 lows has been consolidating in an orderly fashion.  However, please use the near-term tactical levels of support and resistance accordingly.

Near term, an excellent guidepost will be how the equity market responds to its short-term overbought condition. Also, Emerging and Frontier market proxies have formed a short-term pattern of “higher troughs and higher peaks.” 

The odds favor that downside momentum has been broken and a necessary bottoming sequence has started.