Trader Mike asked on Tuesday whether the stock market is free at last of its trading range. He questioned whether the steep ascent can last in the midst of over-bought technical conditions. The financials are not confirming the advance (and likely weighing on the S&P 500 as it has underperformed relative to the NASDAQ). This time, he does not even bother noting the persistence of anemic volume as this has been a consistent and on-going feature of the market that adds doubt to each and every rally.
*All charts created using TeleChart:
Moreover, T2108, the percentage of stocks trading above their 40-day moving averages (DMA), is sitting at 78% after spending two days above 80%. This indicates that the market remains very over-bought. T2108 has now been over the 70% threshold for ten straight days. Roughly 75% of all over-bought periods end by the 10th day. Adding to the negative backdrop to the rally is that short-interest is now at its second highest level of the year. The April peak was the highest. Tyler Durden at Zero Hedge provides an illustrative chart.
In other words, the break above the June highs and the hurdling over previous resistance at the 200DMA and 50DMAs are all very encouraging, but there are sufficient signs that this rally will go the way of so many others the market has experienced during the extended trading range. The key test will come when (if?) the S&P 500 retests the 200DMA around 1117. If this support holds, the rally could finally get some legs. If significant buying volume fails to materialize, I will have to remain skeptical. (Note that in my last general technical commentary on the market, I speculated that the S&P 500 would rally to a marginal break of the June highs before falling back again).
Be careful out there!
Full disclosure: long SSO and XLF puts