Stocks defied the odds on Monday, and then again on Tuesday. That is, two of the market's key indices punched through technical ceilings, and then followed through. They got some help, mind you. Inflation continues to cool (more or less), boding well for the economy. The reason doesn't entirely matter though. What matters most is the impact. Thanks to the technical breakout, it's now easier for the market to keep moving higher, and tougher for the bears to up-end it.
First things first. Let's start with the S&P 500. You may recall from this weekend's Weekly Market Outlook that a Fibonacci retracement line at 4305 — and also where the index peaked in August — was where the index topped out late last week. That ceiling no longer stands in the way though.
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In a similar (but not identical) vein, the NASDAQ Composite broke all the way through its arguable ceiling at 13,200, where the index peaked in August. This resistance line was already starting to crumble as of last week. As of Tuesday though, it's no longer in play at all.
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Even the Dow Jones Industrial Average is getting in on the act, although it's lagging the other two indices.
You may recall this blue-chip-laden index has been lagging for some time actually, with investors seeking out more aggressive tech and growth stocks at the expense of more stable but slower-moving blue chip stocks like the ones typically found in the Dow. That's why the Dow Jones Industrial Average isn't at new multi-month highs like its counterparts. The Dow did break above a key technical ceiling all the same though. That's the falling resistance line (bold, blue) connecting all the key highs going back to early last year. It's a "just barely" move, but Tuesday's close was above that line.
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There's still one potential ceiling in place though. That's the horizontal resistance line (blue, dashed) at 34,313. It was touched on Tuesday, right where the Dow Jones Industrial Average has found a ceiling several times since January. It's curious that this is where the bears made their stand. The index really needs to be above this resistance level before fully entertaining thoughts of a June/July rally.
Just bear in mind that doesn't have to happen straightaway. Indeed, it may not happen straightaway given the shape of things at this time.
Yes, with the exception of the Dow, the market did "break out." It's not the ideal thrust though. It was already overextended from January's bullish pivot, having
never relieved any tension with a healthy dip. Now the rally is even more strained, aching for a pullback.
Just don't panic if that's what we end up getting. Thanks to this week's big advance, any pullback is more likely to find support sooner than it otherwise might have without the big gain.
In fact, that might be the best thing for stocks at this time. If it continues to move higher and sets up any more profit-taking potential, any downward move might develop so much bearish momentum that it ends up being unstoppable by any of the most likely technical floors. Those likely floors, of course, are the indices' key moving average lines.
The situation is fluid, of course. In other words, you should be reassessing the market's charts every day, looking for new hints. The big ones this week so far are just the simple fact that stocks got over a major hump. That move ups the odds of more bullishness ahead, and lowers the odds of major downside.
Still… don't ignore just how overbought stocks are at this point.