Three white soldiers lead the way

Mid-week market update: The “three white soldiers” candlestick pattern is made up of three long white candles, and typically occurs after a falling price trend. It is indicative of strong price momentum after a price reversal. This pattern is evident in the weekly S&P 500 chart shown below.  Usually, the market consolidates sideways after the “three white soldiers”, but the market has continued to advance on the back of the strength of the recent breadth thrust signals. As well, the index faces initial resistance at about 4600, which should be overwhelmed in light of a combination of strong price momentum and the lack of volume resistance (see side bars).


This is a timely gift to all investors and traders who observe U.S. Thanksgiving.


Risk on!

The NASDAQ 100 ETF QQQ is exhibiting a similar “three white soldiers” bullish pattern, which I interpret to indicate megacap growth leadership in the latest advance.


Risk appetite indicators are all flashing green and confirming the market advance. Risk on!



Small cap laggards

Do you know what’s not exhibiting strong price momentum? It’s small cap stocks. Take a look at the Russell 2000, where the “three white soldiers” are not evident.


Market breadth is not broadening out in this rally, as evidenced by the relative downtrend of the equal-weighted S&P 500, which gives higher weight to the smaller companies in the index, and the Russell 2000. In the short run, this should not be a concern (see my previous analysis in Will narrow leadership unravel the ZBT buy signal?).


My inner investor has an overweight position in equities. My inner trader has jumped on the bull train in anticipation of a strong rally into year-end. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXL