S&P 500: Breakout Attempt Next?

Last week I said that I thought that any pullback would be quick. This week we got a quick pullback and nice bounce to new rally highs. Volume isn’t the greatest, but it expanded the last three days. Prices still remain within the ascending wedge and are stalled just below the resistance line presented by the top of the wedge. Because the short correction only moved halfway back to the rising trend line, followed immediately by a rally that exceeded pre-correction highs, I have to conclude that a breakout attempt is about to take place.

I have often said that ascending wedge formations are extremely reliable in that they usually break in the expected direction - down. But we have both a long-term (months to years) buy signal and a medium-term buy signal, and prices are still behaving very well. Under those conditions we have to expect positive outcomes.

Of course we have to be concerned by the fact that the market is short- and medium-term overbought, a condition that will provide the “wall of worry” to help move prices higher. The chart below shows what potential buyers must overcome emotionally. Looking at it, I wouldn’t mind holding profitable long positions, but it would be a lot harder to be opening new ones.

We are in the 6-month period of negative seasonality with the last, and worst, two months dead ahead. Perhaps that will be able to break the market’s winning streak. Perhaps not. I find it is always good to be aware of these things, but let prices lead the way.

Bottom Line: Models and price action have us bullish medium- and long-term. And the market’s recent failure to mount a credible correction has set the stage for another leg up.

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