Stocks again made a new intraday 2020 high yesterday, but the bulls were stopped just a point shy of the 3395 mark. Has yesterday's increase invalidated our reasons to be cautious and take profits off the table? In other words, can we expect the bulls to push through the psychological 3400 level and keep trading sustainably above it?

We'll start by examining the daily chart (charts courtesy of http://stockcharts.com).

The bulls opened with a sizable gap yesterday, and have been adding to their gains. Before the closing bell however, stocks rolled over to the downside. Relative to the body of the candle, this created a sizable upper knot - that's a strong sign that the bulls aren't as strong as they appear to be in the very short-term.

Yesterday's close is again right at the lower border of the very short-term rising red wedge. For a second day in a row, the bulls have been unable to return trading back inside the wedge. While that's not apparent in price (yet), it's a subtle sign of their momentary weakness.

As a result, the case for last two days' price action being merely a verification of the breakdown below the rising red wedge, just grew stronger.

And what about today's premarket action? With the S&P 500 futures trading at around 3380 currently, they appear ready to test yesterday's bullish opening gap with its lower border at 3370 - at a minimum and during one of the nearest sessions.

There's one more reason why our yesterday's call of caution to profitably close the earlier long position, is justified. Enter Force Index and the valuable lesson of its divergencies with prices.

Force Index is a unique type of oscillator, because it's not built just around prices. It takes into account volume, and that's its key advantage. How much can we trust a price move that lacks commitment of the bulls (or bears)? Yes, price and volume go hand in hand - it's plain dangerous to ignore either.

We've marked several cases when Force Index has been unable to make new highs while remaining in the positive territory on the above daily chart. Take a good look what have been stock prices doing in the meantime - either scoring new highs, or slowly losing their breath.

And what happened once Force Index declined more noticeably? Prices followed to the downside - on a more or less temporary basis, but nonetheless declined. In all 4 out of the 4 cases examined.

And what about the current setup? Prices are on a slow grind higher, yet Force Index hasn't overcome its mid-February peak yet. Sure, it looks to be on the upswing currently, and has quite a way to go before challenging that peak.

How likely is it that it would make it there? If it did, that would be similar to its mid-December to mid-January performance, during which stock prices went even higher. Should it be so this time as well, that would mean we get stock prices creeping up for weeks to come, without a sizable correction.

But volatility as expressed by the Bollinger Band Width has recently been rising, and it favors seeing some more of it still. And taking into account all of the above, it's our opinion that we're more likely to see some downside move shortly - regardless of whether the bulls take on 3400+ before that, or not.

In other words, the very short-term risks continue to be skewed to the downside. However, keeping in mind the Tuesday-discussed bullish outlook on the weekly chart, such a downswing would offer us a favorable setup to again enter on the long side and enjoy the gains still ahead in this longest-running stock bull market.

Summing up, the medium-term S&P 500 outlook remains solidly bullish, yet the noticeable signs of deterioration on the daily chart continue to persist. It's the bulls' weakness in moving back inside the rising wedge, or the Force Index divergence and volatility examination. Faced with a deteriorating risk-reward prospects, we've made the right decision to cash in earlier profits. A move lower shortly appears more likely than not, and it would offer us an opportune setup to get back in on the long side to reap more fruits of this stock bull market. It remains intact and much higher prices are to come. Our aim is to let the many bullish factors in this stock bull market keep working to our benefit - but the risk of short-term downside remains too high to ignore.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care

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Stocks reached out for new 2020 highs yesterday, and have marginally overcome futures' Monday session highs. Yet, they suffered a setback yesterday, and price action left the very short-term rising wedge. But the bulls erased a good deal of previous losses, and are again reaching higher. What does it mean for the short-term outlook?

We'll start by looking at the daily chart (charts courtesy of http://stockcharts.com).

The first thing that strikes the eye, is that yesterday's price action took place outside of the very short-term rising red wedge. While there's no major difference between the opening and closing prices, this is significant. Short-term significant, to be precise.

As we've just met a very similar candle in oil, let's quote from our yesterday's Oil Trading Alert. It's relevant for stocks as well because it strongly reminds of the candlestick seen earlier - it's called hanging man, and it has bearish implications:

(...) This candlestick pattern is created as a result of higher market opening, which turns out to be too high. The sellers in such cases take the initiative and push the price down. The buyers, however, pull it up with the last of their strength, and a candle's small body is the result, just as yesterday. Additionally, the candle features a long lower shadow - the longer, the better. It suggests that declines may be just around the corner.

At this point, it is worth keeping in mind that this is a single-candle formation, so it requires confirmation. (...) If the market opens lower right after the mentioned hanging man, it creates a bearish gap. Then, it may turn out that there are too many bulls with long positions who would be looking for selling opportunities.

If you look carefully, Monday's price action fits the above description quite well. Not outrageously high, but a higher open still - and followed by a lower knot. And stocks opened with a bearish gap yesterday, only to drop significantly lower before paring their losses before the closing bell.

While stock futures are pointing up to open at over 3778 today, we are of the opinion that this is a reasonable moment to put up our guards and in the interest of the risk-reward perspective, to close the currently profitable open long position.

Why exactly?

There is a creeping deterioration in the daily indicators, with the CCI on the verge of issuing its sell signal. The indicators can only be extended for so long before getting aligned with the price action. And the very short-term risks have shifted to the downside.

Should we treat yesterday's close practically at the lower border of the rising red wedge as breakdown invalidation or breakdown verification? In our opinion, it should be preliminarily treated as breakdown verification as prices haven't really rallied back into the wedge. They just bounced from the first line of support we've identified yesterday - the rising blue support line.

Sure, the breakdown isn't verified by several consecutive closes yet. But the volume comparison indicates increasing interest of the bears and another and more committed attempt to drive prices lower is probable to happen soon.

Does it change the medium-term outlook? No, there's no chart damage to speak of. Let's recall our yesterday's observations regarding the weekly outlook:

(...) Stocks built on last weeks' gains, and keep trading farther and farther away from the upper border of the rising purple trend channel. While weekly volume doesn't flash any warning signs of an impending reversal, what about the other indicators?

Both the RSI and CCI are back into overbought territory, and their brief dips that flashed sell signals have been invalidated. Acting on Stochastics' sell signal generated in its overbought area would indeed lead to a whipsaw. In short, the weekly indicators continue to comprehensively support the bulls.

And what about our yesterday's notes on market breadth:

(...) The decline in both the advance-decline line and the advance-decline volume spells a short-term deterioration, yet new highs minus new lows keep moving higher. This constellation points to stocks undergoing a soft patch that isn't (yet?) reflected in prices. Why is the yet with a question mark? It's because this might be all there is for the soft patch, and all the earlier mentioned signs of caution may as well get worked out by a shallow correction and a continuing slow grind higher.

Remember, the bullish percent index solidly above 50% and not in a recent downtrend, shows prevailing buying interest - in other words, upswing confirmation and the bull market is the valid conclusion here.

It must be said, we've seen a short-term deterioration in all of them apart from new highs minus new lows.

There's one more reason for short-term caution. The VIX, the volatility measure. During the recent upswing, it turned predictably lower. Yesterday's action means it's turning up - and it would turn up more should prices not erase their earlier losses before the closing bell.

Summing up, the medium-term S&P 500 outlook remains solidly bullish, yet we see noticeable signs of deterioration on the daily chart. While the upswing continuation is favored in the medium term, we expect more downside action and shortly. Therefore, we're taking profits off the table, and let the likely deterioration in short-term prices play out without hurting our bottom line. Once justified by the risk-reward perspective, we'll get back on the long side, as the stock bull market remains intact and much higher prices are to come. Our aim is to let the many bullish factors in this stock bull market keep working to our benefit - but the risk of short-term downside got right now too high to ignore.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care

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Stocks are entering the holiday-shortened week on a strong note. There was no selloff on Friday, as has been the case three preceding weeks in a row. This weekend, there were no spooky coronavirus headlines. Stocks finished on Friday close to their yearly highs, and the beat goes on. In light of today's premarket decline, the following question is in order. Does the beat really go on?

We'll start the thorough examination with the weekly chart (charts courtesy of http://stockcharts.com).

Stocks built on last weeks' gains, and keep trading farther and farther away from the upper border of the rising purple trend channel. While weekly volume doesn't flash any warning signs of an impending reversal, what about the other indicators?

Both the RSI and CCI are back into overbought territory, and their brief dips that flashed sell signals have been invalidated. Acting on Stochastics' sell signal generated in its overbought area would indeed lead to a whipsaw. In short, the weekly indicators continue to comprehensively support the bulls.

Let's move to the daily chart.

Last Tuesday's candle wasn't a hallmark of topping action. Neither were the extended daily indicators. Yes, they look tired and in need of rest but that doesn't mean stocks have to oblige and roll over sizably. Sure, their position deserves attention but they have not flashed reliable sell signals.

The very short-term rising red wedge warrants caution. Not for its steepness but because rising wedges usually bring about a bearish resolution as prices have to maintain upside momentum to keep trading inside the formation. Should prices break down from it, their first line of support would be the rising blue trend line.

As a result, the daily outlook is vulnerable to a downside hit, even as the bulls are making new highs. It would take several strongly bearish sessions to take away the bullish bias though - and none has taken place.

What about the breadth indicators, what are they telling us in the short-term?

Nothing all too special. The decline in both the advance-decline line and the advance-decline volume spells a short-term deterioration, yet new highs minus new lows keep moving higher. This constellation points to stocks undergoing a soft patch that isn't (yet?) reflected in prices. Why is the yet with a question mark? It's because this might be all there is for the soft patch, and all the earlier mentioned signs of caution may as well get worked out by a shallow correction and a continuing slow grind higher.

Remember, the bullish percent index solidly above 50% and not in a recent downtrend, shows prevailing buying interest - in other words, upswing confirmation and the bull market is the valid conclusion here.

Let's check now whether we can find more clues looking into the internals.

It's the ratio of consumer discretionaries to consumer staples that you can see below the price chart. Intuitively, discretionaries outperforming staples should highlight bright economic outlook that gets reflected in higher stock prices. Let's examine the previous cases (circled in red on the above chart) that are similar to the current situation and see how they were resolved.

They send a bullish message, as out of the 6 instances, 4 were followed by upswing continuation, 1 by prolonged topping action, and 1 by a lengthy but relatively shallow downswing that gave way to upswing continuation next. In both not-immediately-bullish case, one had to wait about a month for the upswing to continue.

So, it's safe to say that if the indicator confirms the price advance, it's one more bullish signal. When it doesn't, it either catches up over time, or the divergence gets resolved by the price moving lower temporarily - remember the above 2 cases. It has to be said though, that a divergence with the Q3 absolute indicator's top can last for a very long time and not trigger a sizable downside move while it lasts.

It's true that the ratio has topped in Q3 2018. Yet after bottoming out in December 2018, it hasn't been standing in the way of the stock rally, and its ongoing divergence didn't trigger a plunge in stocks. Now, it's encouragingly curling higher, and its 2020 low is higher than the December 2019 low. That's bullish for the medium-term.

If we look at the ratio of consumer discretionaries to the stock market, we immediately see whether they outperform the whole stock market. When they do, it again points to improving outlook, and works as a tailwind for stocks. It must be said, the ratio is rising since the January 2020 bottom, which adds to the medium-term bullish picture.

While the bulls still have quite a job ahead since the ratio topped in Q3 2020, remember that such divergencies can take ages to resolve. Therefore, look at their recent dynamics and swing structure instead of an absolute level.

Semiconductors are another promising area to look at. While the retail side of the market tends to catch fire in the latter stages of expansions, this is more of a leading or coincident indicator if you will. And it has to be said that semiconductors have been doing very well recently.

Rising strongly throughout 2019, they dipped briefly in late January 2020. A strong recovery followed and previous highs are in sight. That's another medium-term confirmation of the current stock advance.

Before summarizing, let's turn to small caps.

They're a valuable indicator showing the breadth of market advance. Do they confirm the current one? They still have to rise a bit more to overcome their 2020 highs. But how much of a concern is it that they haven't yet done so? Since bottoming out in December 2018, they have been slowly but surely moving higher.

The weeks of their sideways trading weren't an obstacle to stocks making higher highs and higher lows - and we expect it to be the case into the future too. In other words, this short-term non-confirmation doesn't have bearish implications

As you have seen, the technical factors speak overwhelmingly in favor of the long position. The medium-term charts have a strongly bullish outlook, and it's only the short-term where we see some potential for a spanner in the works of new 2020 highs on a daily basis. Last but not least, the fundamental backdrop presented presented on Friday to our subscribers supports higher prices ahead as well.

Summing up, the S&P 500 outlook remains bullish. Price examination, weekly and daily indicators are still sufficiently supported by the breadth indicators, and continue to favor upswing continuation. While there are signs warranting caution on the daily chart, and divergences in market internals such as consumer discretionaries to consumer staples, consumer discretionaries to S&P 500, semiconductors or small caps to the S&P 500, they aren't an obstacle to the bull market continuation. Favorable resolution is expected as the index keeps making and challenging new 2020 highs practically on a daily basis, any imaginable correction isn't likely to stretch much below 3200 in our opinion. The currently open long position remains justified, and our aim is to let the many bullish factors in this stock bull market keep working to our benefit.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care

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