Just A Bull Trap?

The quiet start to the week for the stock market was followed by a sharp two day decline that took most of the averages back to good support. That erased some of the recent market gains and caused an increase in the bearish market commentary. I was what I was looking for in last week’s comment that the “more volatile ETFs are overbought with double-digit gains and could easily see a 1-2% pullback.”

The weaker Retail Sales and Fed comments once again increased recessionary fears that helped fuel the selling. The pessimistic views of the world economy expressed by some CEOs at the World Economic Forum in Davos did not help.

By Thursday’s close many were convinced that the rally from the start of the year was already over as the put buying increased on Wednesday’s decline. The 2.9% Friday gain in the Nasdaq Composite was the best performance since November as tech shares led the market higher.

They were boosted in part by the better-than-expected earnings from Netflix
NFLX
(NFLX) and traders were encouraged by the job cuts in the tech sector. Many of the tech giants are scheduled to report earnings this week so volatility is likely to remain high.

Even with Friday’s nice gains, there were few markets with positive weekly performance but the Nasdaq 100 managed a 0.7% gain and the SPDR Gold Shares (GLD
GLD
) was up 0.5%. The big losers were the Dow Jones Utility Average and the Dow Jones Industrial Average, down 2.8% and 2.7% respectively.

The Dow Jones Transportation Average lost just 0.1% while the S&P 500 dropped 0.7% and the iShares Russell 2000 dropped 1.1% for the week. The Market internals did close positively as on the NYSE there were 1811 issues advancing and 1478 declining.

It was also a good sign that there were 228 new weekly highs on the NYSE with just 28 new lows. The daily analysis of the number of NYSE stocks making New Highs and New Lows in late 2021 and early 2022 warned that the stock market was likely to top out.

The pattern of fewer NYSE stocks making New Highs, line a, warned that fewer and fewer stocks were moving the averages higher at the end of the higher. This was supported by the surge in stocks making New Lows as more stocks were declining than rising.

In October it was the opposite situation as the number of New Lows peaked ahead of the NYSE, line d, which was a positive sign. It was a sign that fewer stocks were pushing the NYSE Composite lower. The simultaneous increase in the number of stocks making New Highs was consistent with a bottom and there was a new multi-month high last week, line c. They are still well below the May 2021 high of 674.

The Spyder Trust (SPY
PY

SPY
) reached the support on the hourly chart (see Tweet) and violated the monthly pivot at $388.60 before closing Friday at $395.88. The 20 day EMA and 50 day moving average were successfully tested. Once above $400, the R1 is at $402.44 with the December high at $408.61.

The sharp price decline last Wednesday was not reflected by the market internals which were just 2-1 negative. By Thursday’s close S&P 500 Advance/Decline line had dropped towards the support at line a and then reversed sharply to the upside. The NYSE Stocks Only Advance/Decline line tested the support at line b, before turning higher.

The NYSE All Advance/Decline line was even stronger as it had only a minor pullback before closing at a new high for the year on Friday. This is a bullish sign for the overall market and favors higher prices in the weeks ahead.

So far in January, there are six of the level S&P sectors that are up more than 4% led by the Communications Services Sector (XLC
XLC
) which is up 12.7%. This ETF has 23.7% in Meta Platforms
FB
(META) and over 22.6% in Alphabet (GOOG, GOOGL). The other two top-performing sectors were Real Estate Sector (XLRE
XLRE
) and Consumer Discretionary Sector (XLY
XLY
) as both were up over 7%.

XLC has been higher for the past three weeks after triggering a weekly doji buy signal with the close on January 6^th. The move above the early December high at $52.19 completes the trading range on the daily chart. This has upside targets in the $60 area which corresponds to the resistance at $60.24, line a, and the 38.2% Fibonacci retracement resistance.

The relative performance (RS) is rising and above its WMA but now likely needs to move above the resistance at line b, to confirm that XLC is leading SPY. The weekly OBV has closed above its WMA but is still well below the downtrend, line c.

This week’s market action has improved the technical outlook and provides further evidence for me that an important stock market bottom is in place. It still seems that a majority on Wall Street are still too negative on the stock market and economy. Some think the rally so far in 2023 is just a bull market trap.

That is not supported by the NYSE All A/D Line and it will take a much stronger rally before they are convinced. It would now take a massive downside reversal and a close below the prior two week lows to reverse the technical improvement. Just remember to stick with the market leaders and don’t forget to manage your risk.