S&P 500: Bulls Have Control

After last week’s price surge I speculated that it was an “initiation climax”, meaning that climactic price activity, confirmed by very high readings on short-term indicators, was likely the initiation of a new rally. A price climax is typically followed by a “pause to refresh”, a short period where prices correct, consolidate, or continue to move in the direction of the climax at a greatly reduced rate of speed. Indicators take the opportunity to clear their overbought conditions. After the pause, we should expect that prices will continue to rally for an extended period.

As it has turned out, my analysis was correct - it was an initiation climax. And the pause after the climax was the most positive of the three possibilities. The advance continued but at a slower rate, and short-term indicators pulled back toward neutral.

Below is a chart of the CVI (Climactic Volume Indicator) where you can compare climactic internals with price action.

I think the weekly chart (below) does a good job of conveying the power in this rally. We can see the breakout above the long-term declining trend line, as well as the horizontal resistance, which is the neckline of a reverse head and shoulders pattern. The pattern has executed and the minimum upside price target is about 1200. Ah, yes, but is this breakout a bull trap? I wouldn’t count on that. The market is behaving very bullishly, so we should expect that situations are most likely to resolve in favor of the bulls.

Bottom Line: After a few months of consolidation, the bulls seized control of the market and drove prices up through some major resistance levels. At this time the market is modestly overbought short- to medium-term. I do not expect this to be a problem for the rally, which I believe will continue for a period of weeks.

Subscribe by RSS Subscribe by Email