For at least three weeks the market has been stuck in a rut with
divergences between the major indices being the defining
characteristic. As of yesterday, most all divergences were removed,
and if you continued to lean with the prevailing trend, then you
were rewarded once more.
Let's take a look at what yesterday's new break higher means.
The two most important takeaways are (1) that this has the
potential to run into the end of year and through early January,
and (2) that the potential gains to come are significant -- another
3% to 4%.
After working sideways for so long, the overbought market has
resolved that extended state through time rather than price. Other
than one jostle lower a week ago which was quickly erased, this
market has worked sideways for two to three weeks without any price
Yesterday's outperformance by the
(INDEXRUSSELL:RUT) -- which, until yesterday, have lagged badly,
creating the divergences in the major indices -- was a very good
signal. Healthy markets are typically driven by smaller, more
nimble firms as well as those that are more technologically savvy.
The more stodgy bread-and-butter firms found in the
Dow Jones Industrial Average
(INDEXDJX:.DJI) have a hard time keeping up in an advancing market.
Assuming this breakout has legs, then the immediate question is how
far it can go now. To answer that, let's take a look at a few
charts starting with the S&P 500. On this index, the bullish
ABCD structure that was already in motion but that had failed to
gain traction is back in vogue now, as seen in the chart below. The
ABCD structure points to another 4% gain still to come.
It just so happens that the daily ABCD pattern comes quite close to
the same pattern that exists on the monthly chart, which targets
On a side note, as you can see, and as has been talked about
, volume continues to tail off as price continues to advance.
Classical technicians keep fighting this trend and pulling their
hair out. Neoclassical theory tells us that the
means nothing though. It's only at points of significance that
volume has any importance. Those points are the anchor bars and
resulting zones that emanate from them. So the next time you hear
someone bemoaning how volume is lacking and that it is a major
issue, just tell them it doesn't matter in general. It only matters
at particular points and on the charts and is but one of three
indicators that should be used. Time and price are the others, of
Inside the S&P 500, the most interesting sectors have been
transportation and technology, but financials are now starting to
perk up, and the regional banks in particular are showing
extraordinary strength as exhibited in the
SPDR S&P Regional Banking ETF
(NYSEARCA:KRE). Here are daily and weekly charts showing breakouts
on multiple time frames; this typically leads to a faster
continuation move in the direction of the break. Note that the
daily chart has already performed the retest and regenerate
sequence and should move now.
Now that the indices are confirming more "up" to come, you need to
be doing the same -- or at least not fighting it. The key today is
for the breakouts to hold and for the Russell to start catching up
to join the senior indices. If that happens, the run into the end
of year is likely in place and once more, you need to run with it.