SPX and NYA: Whipsaw or Melt-Up Coming?

In the last update, I noted that the market looked poised to move higher into the May 6 target zone of SPX 1640-1650, and the market staged a strong rally right from the open, ultimately reaching the upper range of the target zone with ease.  I also discussed that the Philadelphia Bank Index (BKX) should tag 60 or beyond, and it experienced a blistering 2% rally and came within pennies of 60 during that very same session.

So what now?  Well, whenever targets are reached, some order of caution is called for, so let's take a look at the charts and see what's going on.

Let's start off with the big picture, and a weekly chart of the NYSE Composite (NYA).  For many years, I've been a fan of tracking this index, because it's a much better representation of the broad market than the indices which typically steal all the news coverage (like the SPX and INDU).  It's interesting to look back now and see how well NYA has been pointing the way for the past 8 months.

On September 20, 2012, I wrote:

Moving on to equities, and starting with the New York Composite Index (NYA) weekly chart, there are two things that jump out from a price perspective:

1. The recent breakout above a 5-year resistance zone (bullish).
2. 8718 is still intact (not bullish -- not really bearish either, but important).

If you just take a "trade what you see" approach here, then this breakout can't be viewed as anything but bullish.

I tackled this exact same chart again in January 31, 2013, and my observations were as follows:

Finally, I'd like to revisit the long-term NYSE Composite  (NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012.  Note that weekly RSI is again overbought, and again has confirmed the rally to this point.  This behavior typically implies a correction, followed by new highs.

The correction and new highs have both since happened, which brings us to the present.  NYA's weekly RSI has reached the overbought zone again, and although in and of itself this doesn't guarantee a correction, it is something to be cautious of as one precursor.  It is worth noting that the last two times I mentioned this indicator (same dates as above, see chart), the market corrected almost immediately thereafter.  Doesn't mean that's going to happen this time, but we should stay alert for any signs of said correction (there are none so far). 

In either case, there's still no reason to be anything but bullish about this chart from a longer-term perspective.

The Dow Jones Industrials (INDU) have broken out slightly over the upper boundary of the intermediate channel.  In a moment, we'll see that the S&P 500 (SPX) has done the same.

The SPX hourly chart shows a similar breakout.  This is an inflection point, and if bulls can hold the breakout, they have melt-up potential. Bears will need to whipsaw this breakout if they are to get anything going -- and I do think they have a shot at doing exactly that, based on the 5-minute chart which follows (after this chart; SPX hourly below).

I find the near-term pattern in SPX interesting, since it's currently a bearish rising wedge.  This pattern suggests there's some hidden bearish "potential energy" in this picture, and rising wedges often return to the point at which they began.  Thus, referring back to the channel breakout above, the potential does exist for a whipsaw.  In this market, who knows though, and a melt-up wouldn't surprise me one bit either. 

In either case, while I'm not always certain what the market will do ahead of time, these are the inflection points I look for as a trader.  Prices could move a bit higher over the near-term, possibly to overthrow the upper trend line slightly, but there are already enough squiggles to count the waves as complete.

 

In conclusion, the market has now reached my targets from early May, and also appears to be reaching a larger inflection zone.  The next few sessions should help us determine whether the recent channel breakouts will whipsaw, or lead to a melt-up.  Trade safe.

 

Reprinted by permission; copyright 2013 Minyanville Media, Inc.