Trend Check with Tushar Chande

How High for the Summer Rally?

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Green shoots of a summer rally appeared this week after the Dow cracked resistance at 25,000 and held the breakout.  The summer rally is often viewed as a 13% move from the lows in May/June to the highs in July/August/September.  This week the market made it about half way there (see Chart 1).   There is much resistance overhead, but the market if off to a good start towards a Summer Rally this year.

 

Chart 1: The historical range for the summer rally is about 13% from the May/June lows to the summer highs, and we are off to a good start.


 

Trend-Weighted Breadth Turns Higher

Market breadth has been weak, with small-caps gaining on large- and mega-cap cousins.  In Chart 2 below I compare the trend-weighted breadth of the Dow 30, to the Small Cap 600 index, the Fidelity Select funds for sector breadth, the Vanguard cap-weighted ETFs for market-cap checks, and the S&P 500 universe for large-cap breadth.   The purple line at the top, which represents the action of market-cap weighted ETFs, has moved up smartly over the past month or so.  Observe how the purple line was pegged at 100 during the strong up-trend from September through January this yea.   We know the Dow 30 have been lagging the other indexes, and its crimson line is just moving sideways over the past month.   A wide variety of sectors have started to bottom (the green line of Fidelity Select funds), with small-cap breadth nearing its January highs (dashed line).  Large cap stocks (blue line) have also bottomed in May.  The trend-weighting means that the longer-term trend has higher weight, so the longer-term consolidation effects since February are finally being overcome.  This should help support a summer rally this year.

Chart 2: The trend-weighted market breadth has started to recover over the past month or so, helping support the market rally.

 

Bullish Short-term Momentum

I had remarked last week that there were signs of bullishness in the 2-hour chart because the 200-bar stochRSI had risen above 0.8.  The market pushed higher, pushing the stochRSI closer to 1.  Observe the similar chart pattern during the rally late last year (see Chart 3).  The large-caps are now nearing resistance at 2800 which must be overcome before the rally can challenge the old highs (see Chart 4).

 

Chart 3:  The market followed through on the signs of bullishness I pointed out last week.  The 200-bar stochRSI now is in a bull-trend configuration, similar to what we witnessed late last year and in January. 

 

Chart 4: The market sprung a bear trap last week as it broke a small triangular formation to nudge into strong overhead resistance.

 

Looking Ahead

There is head-line risk next week due to the US FOMC meeting and the summit in Singapore.  Until we can clear 2800, the various gaps and resistance levels can trip the market lower at any moment.

 

 

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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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