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S&P Testing December Highs

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While market sentiment is showing signs of improvement, the biggest hurdle for stocks remains the Fed. There appears to be a disconnect between improving market action and an aggressive Fed that appears determined to keep hiking rates until inflation is finally brought under control. In addition, inverted yield curves continue to predict the likelihood of an economic recession which would be negative for stocks. At such times, technicians need to rely more than ever on market charts to help determine likely market direction. The next big test will come after next week’s Fed meeting. And how stocks react to what the Fed does and says about its future intentions.

Technical conditions continues to improve.

The Chart below shows the S&P 500 clearing its 200-day moving average (RED line).

The next test will be the ability of the SPX to clear its December high.

Additionally, the 50-day moving average (BLUE line) is very close to testing its 200-day line and may be nearing a “golden cross” which occurs when the shorter line crosses above the longer. That would be another positive sign.

Other indicators also appear supportive. For example, two-thirds (66%) of SPX stocks are trading above their 200-day average. And the NYSE common stock only advance-decline line has risen to the highest level in five months.

The next Chart shows the NYSE Bullish Percent Index against its August peak at 60%. That index measures the percent of stocks on point & figure uptrends. A close above that August peak would be a positive sign for stocks. Another sign of positive breadth is the fact that most sector indexes have exceeded 200-day moving average lines. Some have also experienced “golden crosses”.

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Eight sector SPDRs are trading over their 200-day lines. The next chart shows the Technology SPDR (XLK) clearing that major resistance line this week. Due to its size, the XLK carries a lot of weight in the S&P 500; an upside breakout would be a positive signal.

Four market sectors have already experienced “golden crosses” with their 50-day lines exceeding 200-day lines. They include financials, industrials, energy, and materials.

The table below ranks the eleven market sectors for the past week with nine positive and two negative.

Economically-sensitive consumer discretionary stocks, technology, communications services, and financials lead the way. The weakest sectors were utilities, healthcare, and consumer staples which are all defensive in nature.

Technicals suggest that investor confidence appears to be improving.