Tuesday, January 03, 2017

Equity Market Technicals Still Leaning Bullish

Yesterday I wrote that investor sentiment is broadly more bullish at the start of 2017 versus the beginning of 2016. Elevated bullish sentiment tends to be a contrarian indicator and can coincide with near term market tops. Now having noted the heightened sentiment measures, but shifting to a technical view of the market, some market excess has been worked off in the last few weeks of December with the S&P 500 Index down 1.4% since December 13th.

As the above chart shows, the late December weakness has created a bull flag formation during this two week period with the market trending lower. Additionally, the Money Flow Index (MFI) has retraced to a more neutral level while the stochastic indicator is near an oversold level.

Lastly, in Charles Kirk's weekend report from The Kirk Report, he included the below chart detailing the triple top pattern that has formed for the S&P 500 Index.

His commentary that accompanied the above chart notes,
"On a very short-term basis (30 minute view), it appears we’ve seen a triple top type trading range breakdown reversal that has hindered that 2280 target from being acquired. This has also formed a new potential bull flag formation. It would be unusual to see a major market reversal/correction begin from this kind of consolidative formation." 
"Pullbacks, reversals, and corrections begin with one bearish play seeing successful target acquisition followed by other larger ones. At the moment, at best we have seen one minor reversal play out last week, but whether another bigger reversal play now forms and fires from here is something we will be watching for as trading gets underway this new year. We’ll be concerned if we see a strong downside move back below 2180."
So, as the new year begins and sentiment is decidedly bullish, the technical picture continues to lean bullish. The consolidation that took place at year end may position the market for a decent January, at least through Inauguration Day.

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