Zak Mir on Whatever Happened to the Great U.S. Stock Market Breakdown?

So far, 2014 has been a distinctly mixed affair for the bears. It was great for them in January but difficult ever since. This is despite the point in the interest rate cycle which we are at both Stateside and in the UK. But as is always the case with the markets, it is a matter of timing.

I recently read one “junk” financial markets email containing the comment that “only a Black Swan event can get the equity market to crash.” This is not very helpful, but a reminder of how frustrating it must be for those who regard stocks as grossly overvalued and are seeing them head to record territory. This is especially so in the U.S., where tapering of QE is already underway. Even in the UK we are being flagged that, due to the housing bubble, interest rates may have to rise sooner than many have expected.

A walk through the current charting positions of leading U.S. indices backs the idea of further near term frustration for the bears. However, it could be the case that lower volumes over the summer period may mean that the House of Cards allegedly towering over us takes a tumble.

S&P…

A look at the S&P shows that there are several key bullish technicals at play. For instance, support since March has tended to come in at, and briefly below, the former turn of the year 1,850 zone resistance. Support at former resistance is normally only seen in the most constructive of stocks or markets. This is over and above the way it is possible to draw a rising trend channel on the daily chart since October.

The floor of the channel currently stands at 1,850 itself. But there is more. Since the end of April we have witnessed three bear trap rebounds from below the 50 day moving average, now at 1,869. These can be classed as three serious attempts to de-rail the uptrend. It is not surprising that following this, last Friday was the first close above 1,900. But this could just be the start of a new leg to the upside, not the final squeeze past a round number.

The RSI oscillator window shows a line of resistance through the indicator trace from March at the current 59 level. Given the way that this feature has been blocking progress for such a long period, one would expect to see the logjam resolved in the form of quite a sharp break to the upside. While 1,950 plus may be pushing it as an end of June target, if this setup has the power which is implied historically the longs stand to be pleasantly surprised.

Nasdaq 100…

While the broad based S&P may always have been a relatively difficult prospect for the bears given the (albeit erratic) recovery in the U.S., they might have felt they were on more solid ground with the new economy and the Nasdaq 100. While January to February and March to April did serve up modest declines, both were well camouflaged within an October rising trend channel. What really marks this situation out as an ongoing rally, rather than a top, are a couple of strong charting features.

The first is the way that the Nasdaq 100 has not even touched its 200 day moving average on any dips since December 2012. The second, and perhaps even more telling, is the as yet unfilled gap to the upside through 3,300 in October. The following month only saw the most perfunctory attempt at filling this gap, which suggests that the momentum is very much still going to be with the buyers. Even the April bear trap dip below post December support failed to get anywhere near the 200 day moving average, then at 3,400.

Over the next month we are looking at a possible fresh rebound off the floor of an October price channel and a break back above the 50 day moving average. The rising trend line from April in the RSI window adds power to this action. The implication is that at least while there is no end of day close back below the 50 day line we could see a 1-2 month target for this market as high as the 2013 price channel top at 4,000.

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