Weekly Technical Market Outlook 12/29/2014

Welcome back. I hope everyone had an enjoyable Christmas and was able to spend time with family and friends. While trading was a shortened week, the major indices were able to continue their drift higher.

Trend

Of course with the march higher in the S&P 500 ($SPX), the trend remains positive. While we often draw trend lines connecting lows, the chart below shows a trend line connecting the highs over the last year. You’ll notice we are bumping up against this level of potential resistance. We’ll see if traders deem this important based on the price action we see this week.

Breadth
One of the biggest developments that took place last week was the final confirmation in the Common Stock-Only Advance-Decline Line. I had been discussing the divergence in this measure of breadth for the last several months. I’ve noted that the bulk of the other large-cap Advance-Decline Lines had already confirmed. We also saw the small-cap and mid-cap A-D Lines hit new highs as well. The Percentage of Stocks Above Their 200-day Moving Average while making improvement, remains in an established down trend.

Santa Claus Rally
Many traders have been tweet, writing, and discussing the historical seasonal advance in stocks, dubbed the “Santa Claus Rally.” Ari Wald, who serves as the Head of Technical Analysis at Oppenheimer wrote an article on the subject for The Technical Analyst. Ari turned his focus away from the crowd’s focus of how great Santa is for stocks and looked at what if Santa doesn’t show up. He writes, “However, performance in the next 1 to 2 quarters has tended to be below average when the S&P 500 closes lower during the SCR. For instance, the S&P 500 has averaged a 1.4% loss and a 0.6% loss in the subsequent 3 and 6 months, respectively, following a negative SCR, versus an average 2.8% gain and 5.3% gain, respectively, following a positive SCR.”

So while traders will be disappointed if they don’t get the juiced up gains many are expecting this week. It seems they take out their frustration on stocks during the following couple of months.

Momentum
While breadth has now confirmed the rally in stocks, momentum continues to show a bearish divergence. The Relative Strength Index ans the MACD indicators remain below their prior highs. This isn’t that surprising since the bulk of the bounce off the December low spanned just a couple of days. It’s tough for indicators like the RSI and MACD to snap back as fast as price as, which is why this current divergence is not a huge concern to me at the moment. However, as I wrote about on Dec. 18th, the longer-term view of momentum still favors the bulls.

Is January Dangerous? 
Dana Lyons, who I’ve mentioned a couple of times on the blog, has continued to produce some great charts and tables. Recently Dana showed this table that goes back to 1900 and marks the number of highs and tops seen in the Dow. You’ll notice that December has seen the fewest short-term (3 month) peaks while January has seen the most short-term and longer-term (12 month) highs going back to 1900. We often hear that October is one of the most ‘dangerous’ months for stocks but Dana’s data shows that it’s actually January that’s seen the most bearish turning points for stocks.

Last Week’s Sector Performance
While a shortened week, Utilities ($XLU) remained the best performing sector relative to the S&P 500. Consumer Discretionary ($XLY) which has not had a great year was the second best performing sector followed by Technology ($XLK). Health Care ($XLV), likely lead by biotech, had the worst week, giving reprieve to the Energy Sector ($XLE) for once, which was the second worst performer.

Year-to-Date Sector Performance
Utilities, Health Care, and Technology remain the best performing sectors relative to the S&P YTD. As oil prices have continued to decline the Energy Sector remains the worst performer.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.