Gil Morales recently wrote that the “Domestic equity market looks like it’s trying to put out the cookies and milk for Santa.” From my perspective, following a price low in late October, the S&P 500 Large Cap Index (SPX/2790.37) successfully retested said price low in late November. In doing so, the SPX traced out the often-discussed W pattern, evident by a low-rally-retest bottoming sequence. Consistent with the retest, if I could define “cookies and milk for Santa” as a transition from a downtrend (lower peaks and lower troughs) to a neutral or sideways trend, I would agree with Mr. Morales.

However, in my opinion, it’s too soon to label the Large Cap SPX’s short-term price trend “bullish.” But it is constructive (positive) that the SPX’s short-term price trend has changed from down to sideways. While the short-term price trend of the SPX is neutral, the trend of the SPX A/D Line is supportive of higher prices as it is only nine net issues from new high territory—a chip shot. Side note: I’d label the short-term price trend of both the MSCI Emerging Markets Index and the China Large Cap Fund bullish.

If we saw broader participation on the upside, ideally both domestically and internationally, we would become even more constructive.      

Currently, following last week’s news about the Fed and the weekend “trade truce” between the U.S. and China, my perspective is that “reaction (price response) to the news may be more telling about the market’s short-term direction than the news itself.” To carry this opinion further, yesterday’s price response to the weekend trade news was blasé. I say this because while the SPX gapped higher at the open, its intraday high was recorded within the first 30 minutes of trading, and the index basically closed at the same level it opened. I would have preferred that it built on its early gains and extended higher as the day progressed. As it stands, yesterday’s tape may have been a function of short covering—further follow-through higher will be important.  Also, the response of Small Caps yesterday was, and remains, disappointing (the Russell 2000 underperformed) and is not indicative of risk-on tape action.

Summary: The next four weeks are important for the domestic equity market, as “seasonality” should be a tailwind. Yet with both resistance (selling pressure) currently just overhead and a short-term overbought condition, the possibility for volatility in both directions still exists. However, an “on-again-off-again” rally into year-end would be my “odds-on favorite.” Meanwhile, 2800 to 2817 remains an area of resistance (selling pressure) for the S&P 500 Large Cap Index (SPX/2790.36). 2684 and 2648 should be viewed as tactical support levels into year-end. As Mr. Morales also recently penned, “Keep it simple and keep it safe”—cookies and milk, cookies and milk.

See charts below.

S&P 500 Large Cap Index Chart. S&P 500: 2+ month 30 minute chart. The Green circles (2684 and 2648) are tactical support levels. The Tactical Resistance Range: 2800 to 2817.
SPX Advance-Decline Line Index Chart. The chart of the A/D line (lower frame) is much more constructive than the chart of the cash index (upper frame) and only 9 net issues from new high territory!

A low in October followed by a rally in November and December is what the “seasonal” chart shown below implied. So far, this is what has occurred. While we don’t make investment decisions based on seasonal factors, they help us discern a headwind or a tailwind. 

S&P 500 Index: Seasonal Average Chart based on the thirty years (17.10.1986 - 24.10.2016)

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Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written during and after the market close on 12.03.2018. Chart sources: Stockcharts and Seasonax.       

PDF Copy of Article: Day Hagan Tech Talk December 4, 2018 (PDF)

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