Just a Bull Trap?

A quiet start to the week for the stock market was followed by a sharp two-day decline that brought most of the averages back to good support. That wiped out some of the market’s recent gains and prompted an increase in bearish market commentary. That’s what I was looking for in last week’s comment that “more volatile ETFs are overbought with double-digit gains and could easily see a 1-2% pullback.”

Weaker comments from retail sales and the Fed once again added to recession fears that fueled the sell-off. The pessimistic views about the global economy that some CEOs expressed at the World Economic Forum in Davos didn’t help.

By Thursday’s close, many were convinced that the early-year rally was over, as buying on Wednesday’s decline increased. The Nasdaq Composite’s 2.9% gain on Friday was its best performance since November as technology stocks led the market higher.

They were boosted in part by better-than-expected earnings from Netflix
NFLX:
( NFLX ) and traders were encouraged by job cuts in the technology sector. Most tech giants are due to report earnings this week, so volatility is likely to remain high.

Even with Friday’s strong gains, there were few markets positive for the week, but the Nasdaq 100 added 0.7% and SPDR Gold Shares ( GLD ).
GLD:
) increased by 0.5%. The big losers were the Dow Jones Utility Average and the Dow Jones Industrial Average, down 2.8% and 2.7%, respectively.

The Dow Jones Transportation Average lost just 0.1%, while the S&P 500 fell 0.7% and the iShares Russell 2000 fell 1.1% for the week. Domestic market indicators closed positively as there were 1,811 issues advanced and 1,478 declined on the NYSE.

It was also a good sign that the NYSE posted 228 new highs for the week with just 28 new lows. A daily analysis of the number of NYSE stocks in late 2021 and early 2022 warned that the stock market is likely to outperform.

The pattern of fewer NYSE stocks making New Highs, line a, warned that fewer and fewer stocks are pushing averages at the higher end. This was supported by rising stocks making New Lows as more stocks fell than rose.

In October it was the opposite as the number of New Lows peaked before the NYSE, line d, which was a positive sign. That was a sign that fewer stocks were pushing the NYSE Composite lower. A simultaneous increase in the number of stocks making new highs was in line with the bottom, and a new multi-month high, the c line, was set last week. They are still well below the May 2021 high of 674.

The Spyder Trust (SPY:
PY:

SPY
) reached time table support (see Tweet) and breached the monthly pivot at $388.60 before Friday’s close at $395.88. The 20-day EMA and 50-day moving average were successfully tested. R1 above $400 is $402.44 and the December high is $408.61.

Last Wednesday’s sharp drop in prices was not reflected by the market’s domestic internationals, which were only negative 2-1. Thursday’s closing S&P 500 Advance/Decline line dipped to support at line a, then turned sharply higher. The NYSE Stocks Only Advance/Decline line tested support on line b before turning higher.

The NYSE All Advance/Decline line was even stronger as it had only a small pullback before closing at a new high for the year on Friday. This is a bullish sign for the overall market and favors higher prices in the coming weeks.

So far in January, there are six S&P-level sectors that are up more than 4%, led by the Communications Services sector ( XLC ).
XLC:
) which increased by 12.7%. This ETF has 23.7% in meta platforms
FB:
(META) and over 22.6% alphabetically (GOOG, GOOGL). The other two top performing sectors were Real Estate (XLRE:
XLRE:
) and Consumer Discretionary (XLY:
XLY:
) as both grew by more than 7%.

XLC has been higher for the past three weeks after triggering a weekly Doji buy signal after the January 6 close.^th. A move above the early December high of $52.19 completes the trading range on the daily chart. This has upside targets in the $60 area, which corresponds to the $60.24 resistance, the a line, and the 38.2% Fibonacci retracement resistance.

Relative Performance (RS) is moving higher and above its WMA, but should now likely move above the resistance on line b to confirm that XLC is the leading SPY. The weekly OBV closed above its WMA but is still well below the downtrend line c.

This week’s market action has improved the technical outlook and provides me with further evidence that an important stock market bottom is in place. It still appears that the majority of Wall Street is still extremely negative on the stock market and the economy. Some believe that the 2023 rally so far is just a bull market trap.

That is not supported by the NYSE All A/D Line and it will take a much stronger rally before they are convinced. It will now take a significant decline and a close below the previous two-week low to reverse the technical improvement. Just remember to stick with the market leaders and don’t forget to manage your risk.