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There is no denying the power we have seen in danger property because the October market low. When my Market Development Mannequin turned bullish on all three time frames in mid-November, it was troublesome to disclaim the overwhelming optimistic momentum for equities. This sturdy upward momentum has now introduced the key indexes as much as key resistance ranges. Will there be sufficient fuel left within the tank to propel the SPX above 4600 and power a retest of the all-time excessive round 4800?

There are 3 ways to consider this specific state of affairs. First, we will think about the technical configuration of the S&P 500 itself. What can the chart of the SPX inform us in regards to the probability of additional upside? Second, we will dig into market breadth circumstances. Are we seeing indicators of maximum breadth readings that have a tendency seem much like earlier market tops? Lastly, we will evaluate main names within the progress house. Are the Magnificent 7 shares nonetheless fulfilling their management function? What about high names in different sectors?

Conscious traders take time to mirror on their experiences. What labored and what did not? What made your profitable trades so profitable, and what did you study from the trades that did not go so properly?

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On the finish of the day, we’re in a interval of transition. The times of Fed price hikes seem like behind us, and 2024 will nearly actually carry a rotation to decrease charges and a extra dovish Fed. The seasonal playbook (have you ever picked up your 2024 Inventory Dealer’s Almanac but?!?) has appropriately indicated power in November and December. What can worth evaluation inform us in regards to the developments into early 2024?

The S&P 500 Has Stalled Out at 4600

In a bullish market part, charts do not simply commerce to resistance however via resistance. Because the S&P 500, Nasdaq 100, and so many different key charts have approached a retest of their summer time highs, I have been skeptical of additional upside, given the probability of a minimum of a minor pullback from such a major stage.

It is putting to me that the S&P 500 has mainly recouped three months of losses in about 5 weeks. Not a foul transfer off the October low! The RSI additionally confirms the power of the current upswing, going from oversold in late October to overbought in early December.

There are two issues I will level out in regards to the RSI pushing so excessive rapidly. First, it is normally a unfavourable signal within the short-term. To be clear, the market can typically go a lot increased after the preliminary overbought studying, however when the RSI strikes again under the 70 stage, that may typically point out {that a} pullback is now in play.

Second, it is normally a optimistic signal for the medium-term pattern. Charts can certainly develop into overbought throughout bearish market phases, nevertheless it’s far more frequent to see this phenomenon throughout a broader rally. So the straightforward proven fact that the market is overbought is normally an encouraging signal.

Market Breadth Suggests a Pullback is Imminent

Out of all of the S&P 500 members, 83% are at present above their 50-day transferring common. A fast evaluate of this indicator in 2023 will present how this has appropriately recognized a market within the fourth quarter of an uptrend, versus the primary quarter.

The pink shaded space within the backside panel highlights when the indicator has moved above 85%, a stage we simply barely reached earlier this month. The earlier thrice it was above 85% — July 2023, November 2022, and August 2022 — all coincided with significant market tops.

Now, simply because this indicator reaches 85% doesn’t suggest it is the top of the world. In reality, a breadth indicator like this typically serves as extra of an early warning of an impending high, versus confirming a high has already occurred. So there actually be a little bit of additional upside for the SPX. In reality, the panel above exhibits the % of shares above their 200-day transferring common, which is properly above 50%. This means a long-term bullish pattern continues to be in play, so long as the indicator stays above that fifty% stage.

The Bullish % Index for the S&P 500 can be within the excessive bullish area, following the Nasdaq 100’s Bullish % Index above the essential 70% stage this week. Try the red-shaded areas on this chart, and you will see that, when the indicator pushes above 70% after which again under, it is normally an honest time to get defensive in your positioning.

Virtually Each Inventory on the Planet is Overbought

This overextended market is not only outlined as such as a result of the indexes have reached key resistance ranges, or as a result of market breadth circumstances sign overbought circumstances, however as a result of the person shares that make up our main indexes are additionally displaying all of the indicators of exhaustion.

Let’s evaluate some large-cap names, not simply in progress sectors like Know-how, however extra value-oriented sectors as properly.

Dwelling Depot (HD) has round-tripped again to its 2023 excessive round $330, and the RSI is overbought for the primary time because the July peak.

The Monetary sector has rejoined the bullish occasion, with regional banks like Keycorp (KEY) logging strong returns in November. KEY lately broke to a brand new swing excessive round $12.50, and the RSI pushed above 70 proper because the breakout occurred.

The Industrial sector additionally has its share of sturdy current performers, together with airways and different journey names pushing increased as rates of interest and crude oil costs transfer decrease. However MMM and different mega-cap shares on this sector are experiencing overbought circumstances as they push above transferring common assist.

So are overbought circumstances factor or a foul factor? Effectively, each, relying in your time-frame.  As we talked about above, the market has adopted the seasonal developments nearly completely in 2023, and November and December are two of the strongest months of the yr. So the long-term story stays optimistic right here, in my view.

The Santa Claus rally interval is usually incorrectly declared any time there’s an upward transfer in December. However the Santa Claus rally truly solely runs from late December to early January, and is extra in regards to the week between Christmas and New 12 months’s Day. So there’s loads of house within the seasonal expectations for a short pullback in mid-December to set us up for a bullish transfer in early 2024.

On the finish of the day, probably the most bullish factor the market can do is go up. And I nonetheless see that within the playing cards, however solely after the current overbought circumstances are alleviated!

RR#6,

Dave

P.S. Able to improve your funding course of? Try my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.

The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any manner characterize the views or opinions of some other particular person or entity.