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Watch for These Signals of a Bull Market Top

Stay long unless these charts break down


Stocks were mixed Monday, but as a whole managed to hold their own and traded in a constructive manner. There was no economic news of note on this slow summer Monday, which made it easier for traders to focus on price action and fundamentals — or just spend one more day at the beach.

On Monday, I updated my multi-week/month target for the S&P 500 from a previous 1,970 to a range of 1,970-2,000. I believe we will see some consolidation this week and possibly next before working on another rally. However, we must remain flexible in our thought process, as well as our execution. Stocks could continue to ascend vertically this week without a pause.

While it’s still early in the week and anything can happen, how will this market look and feel if the S&P 500 rallies toward 1,980-2,000 without taking a breather? I would be prone to call a move like that a blow-off top for the cyclical bull market, where the short side would become considerably more attractive.

Until that happens, I respect that the broader market is trending higher, and the odds are not in your favor if you bet against it.

In order for me to declare the top in this cyclical bull market, among other things, I either need to see some key support lines break or exhaustion patterns on the three ratio charts below. Ratio charts, which compare the performance of two assets, are helpful in gauging relative strength or weakness. If you don’t already use ratio charts, I urge you to start as they can give you some perspective and reduce the noise of the everyday stock market.

XLK vs SPY Chart
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The first ratio chart compares Technology Select Sector SPDR (XLK) to SPDR S&P 500 (SPY). XLK is showing relative strength after a successful higher low in April.

XLF vs SPY Chart
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The second chart compares Financial Select Sector SPDR (XLF) to SPY. XLF is holding support, and for now, the price action remains constructive.

XLI vs SPY Chart
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Finally, we have the Industrial Select Sector SPDR (XLI) versus SPY. XLI looks strong and is breaking past a resistance area that dates back to the spring of 2011.

Conclusion: While stocks are immediate-term overbought, they remain bullishly positioned in the medium and long term. For me to turn bearish and declare a cyclical bull market top, we need to either see a blow-off top this week, or for the three charts above to exhaust themselves on the long side or break support lines.

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.

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