Why I’m Concerned About This ‘Breakout’

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Editor’s note: Beat the Bell editor Serge Berger will be filling in for Sam Collins until May 26.

It was a fairly quiet Monday as market participants awaited a host of important economic and earnings reports. This is a wonderful opportunity for stocks to melt higher. As I reminded my clients Monday afternoon, “Never short a dull market.”

The S&P 500 managed to break the 2,125 area and closed the day above the previous intraday all-time high from April 27. This came on one of the lowest total volume days on the NYSE Composite.

While I think the path is cleared for a move toward the 2,150-2,200 area on the S&P 500 that I have highlighted for a couple of months, the lack of upside momentum concerns me.

S&P 500 Chart
Click to Enlarge

Note the negative divergence between price and the Relative Strength Index (RSI) at the bottom of the chart. While RSI topped in late 2014, the S&P 500 continued to crawl higher. Breakouts on such low momentum and volume are almost certain to fail.

Last week, I pointed to a few cautionary signs in stocks through a multi-month lens. These included the negative divergence between the Dow transports and Dow industrials, rising volatility in other asset classes, and major divergences between the S&P 500 and its implied volatility.

NYSE Composite Chart
Click to Enlarge

One more sign of caution comes from the NYSE Composite, a well-diversified group of about 1,600 U.S. corporations, as well as some real estate investment trusts (REITs) and foreign-listed stocks.

On the chart, we can see that the NYSE Composite carved out a big consolidation phase since last summer that, along with the October flush-out, essentially consolidated the rally since 2013.

The NYSE Composite has since broken marginally higher and past the horizontal resistance line, but note that this “breakout” has come on very low momentum. And, in fact, it is also flashing a negative divergence between price and RSI.

The chart pattern off the October lows is also taking on the shape of a rising wedge. Coupled with the low-momentum move higher, the index increasingly looks to be at risk of breaking lower.

October’s lows may indeed have been important. But the risk is that we may need to revisit those lows, or at least establish a higher low, before the NYSE Composite can break much higher into 2016.

This isn’t a call to immediately sell stocks and run for the hills, but merely one more thing to watch as we inch closer to the summer months where volatility could begin to meaningfully pick up.

Conclusion

Monday’s break to fresh all-time highs in the S&P 500 and Dow Jones Industrial Average looks promising for marginal upside that traders can continue to take advantage of. But the sluggish way in which these “breakouts” are taking place suggests reduced position sizes on any long-side trades in the indices would be prudent.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/daily-market-outlook-why-im-concerned-about-this-breakout/.

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