Mid-week market update: My inner trader remains constructive in his bullish view for stocks, but the recent advance appears to have gotten ahead of itself. My trading models indicate a 2-4 day period of weakness, followed by continued strength into all-time highs.
In the short-term, the market is flashing cautionary signals for traders. The SPX is exhibiting negative RSI divergences as it broke out to new recovery highs. As well, the VIX Index breached its lower Bollinger Band for two consecutive days, indicating an overbought market. Historically, such conditions have led to market weakness lasting 2-4 trading days. If history is any guide, a short-term trading bottom is most likely to occur either Friday or Monday.
All-time highs ahead
Unless the magnitude of the dip is severe enough to breach the 2800 breakout level, there is no reason why the cup and handle upside breakout target of 2925-2960 should not be reached.
Market breadth, as measured by the Advance-Decline Line, is supportive of further price gains.
And so is credit market risk appetite, as measured by the relative performance of high yield (junk) bonds.
However, short term (1-2 day horizon) breadth indicators from Index Indicators have become overbought indicating a brief pause or pullback is in order.
Subscribers received an email alert yesterday that my inner trader had stepped aside and moved into 100% cash. He is waiting for a dip and short-term breadth indicators to pull back to either a neutral or oversold reading in the next few days before re-entering his long positions.