STOCK INDEXES CLEAR JUNE HIGH -- TEST OF 200-DAY AVERAGES MAY BE NEXT
JUNE HIGHS CLEARED... Last week's message showed major stock indexes testing initial resistance at their June highs, and suggested that an upside penetration of that resistance could lead to a possible test of their 200-day moving averages. Those June highs have since been exceeded. Chart 1 shows the Dow Industrials trading at the highest level in three months and headed toward its 200-day average (red line). As shown last week, a test of that red resistance line would also coincide with a test of a falling trendline drawn over its January/April highs (see blue arrow). The Dow would have to clear both resistance lines to signal that the current rally is more than just a rebound in an ongoing downtrend.
Chart 2 shows the S&P in a similar situation. It's also worth noting that daily MACD lines in the lower box have risen to the highest level in more than year which is normally a bullish sign. Its 14-day RSI line in the upper box, however, is crossing into overbought territory over 70. That suggests that the current rally is beginning to looked stretched on the upside. Both stock indexes have also recovered more than half of their 2022 losses. As with thee Dow, the major trend of the SPX is still down. The SPX would also have to clear its red and blue resistance lines to reverse that major downtrend.
NASDAQ INDEX CLEARS RESISTANCE LINE... Last week's message showed the Nasdaq market testing trendline resistance extending back to January. Chart 3 shows the Nasdaq Index having cleared that barrier which suggests a further rally to its 200-day average. The flat red lines show Fibonnaci retracements of the yearlong decline which may also provide overhead resistance. Notice that the 50% retracement level (middle line) coincides closely with the red 200-day average. There again, a decisive move above its 200-day line is necessary to signal a more substantial rally.
BULL OR BEAR RALLY?... The big question right now is whether the stock rally that started in June is still part of a major downtrend or the start of a new bull market. I still lean toward the more negative view. A modest decline in this week's inflation reports supports the view that inflation may be peaking. A continuing pullback in commodity prices, and oil in particular, also supports that view. So does a pullback in bond yields. Both of those lower trends, however, could also be suggesting a slowing in the economy which isn't good for stocks. So does a continuing inverted yield curve which usually signals recessionary conditions. That's why we look at charts to help determine market trends. And the above charts suggest that the continuation of the market's 2022 downtrend is about to be tested.
