Market Profile of the Continuing Market Rally

Tom Alexander

Tom Alexander

The week beginning November 9 is a very important week in the on-going puzzle of the relentless rally from the March lows. The downside Key Reference Area for the S&P highlighted in the article posted here last week proved to be strong support and the lows into that KRA were accompanied by extreme oversold reading in our market internal work. Each time similar readings have registered in our market breadth work the market has rallied within a day or two and the indices have within a few days regained the prior highs of the rally to that point. If and when this pattern fails it will be a signal of a change in character in the rally and be an initial signal of something more significant to the downside that may be developing. Next week has the potential to see a failure in this pattern.

Both the S&P and Dow are perched just below Key Reference Areas. The S&P closed Friday just below single prints beginning at 1072.60, and if there is much strength into the immediate area above Friday’s close there is likely to be at least a short-term acceleration higher into the next Key Reference area at 1094-1099 that is a High Volume Node and the last potential “resistance” below new highs for the year.

The Dow closed Friday right into the last potential resistance prior to new rally highs, the High Volume Node at 10,630-10,920.

A key tell for the coming week is that if the Dow, S&P and/or Nasdaq 100 trade to new highs is to monitor where the Russell 2000 is trading at that time. As of Friday’s close the Russell was severely lagging the other three US primary trading indices. It is typical at intermediate-term turns for one or more of these four indices to form a divergence by failing to confirm a new high/low formed by the others. At the March low it was the Nasdaq 100 that did not trade to a lower low against its November low as the other three indices were taking out their respective November lows.

If there is any significant strength left in the rally the Russell 2000 will soon have to join the party and begin to quickly play catch-up.

If the Dow makes a new high market internals will need to expand over the lackluster levels of the past week that have characterized the rally off last week’s lows. Specifically, the breadth (NYSE advancing vs. declining issues and Nasdaq advancing vs. declining issues) and volume of the market must expand.

Key Reference Areas for the S&P are highlighted on the chart below.

S&P MP

Here is a link to Monday’s Daily Briefing and Strategy Analysis. For those that are interested among other things it provides KRAs for the four primary mini stock indices futures contracts.

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