The stock market had another good showing last week with the Dow Jones industrial average making new all-time highs and the S&P 500 posting recovery highs. Bond yields spiked higher for the second straight week while crude oil tested the recent lows in the $57 per barrel area.
The S&P 500 rose for the third straight week and has advanced nine out of the last 13 weeks since the middle of July. Since mid-August, the index has remained in a very tight, upward sloping channel. On Thursday, the S&P 500 ran right up to the top of this short-term channel, so in our view, a small pullback in the near term could take place.
In addition, the "500″ has moved to up the top of a longer-term channel that has defined the price range for the index since beginning of 2004. The top of this longer-term channel comes in around the 1361 level. A strong break above this channel would set the S&P 500 up for a move to the 1380 to 1400 zone, in our opinion.
The Dow industrials are in all-time high territory so there isn't any chart resistance to impede the index. However, the DJIA is closing in on potential psychological resistance up at the 12,000 level. Often, major round numbers have provided at least short-term, psychological barriers for the major indexes. Like the S&P 500, the DJIA has run up to the top of a bullish channel that has been in place since early 2004. That trendline (channel) resistance comes in at 11,945.
Since there is no chart resistance overhead, we must use Fibonacci analysis to come up with a target for the DJIA. The width of the correction from May to June was 936.60 points. Multiplying this by 0.618, and then adding this to the top of the formationgives us a potential target of 12,221.52 for the DJIA. Doing the same thing with the S&P 500 gives us a potential target of 1388.84.
The major indexes are overbought on a daily basis, so a small pullback in the near term is a possibility. The 14-day relative strength index (RSI) based on the price action of the S&P 500 hit 72.52 on October 12, the highest since November, 2005. Since 2000, the 14-day RSI has tended to peak out between 70 and 75, although there were a couple of instances when the 14-day got up into the 75 to 80 range.
The positive news concerning the daily RSI is that there has not been any negative divergences yet, suggesting the index has further to travel on the upside. Often, technical indicators such as the RSI will trace out one if not multiple divergences before an intermediate-term trend reverses. The daily moving average convergence/divergence is bullish, but also approaching overbought levels. On a weekly basis, the 14-week RSI is at 67, still below what we consider overbought at 70 or above. It is at the top of the range that it has been confined to since early 2004. The weekly MACD is also bullish, and like the RSI, near the top of its recent range.
