I may very well end up having the chart I'm about to share framed and hung up in my office for all the time we've spent looking at it over the past two weeks.
It has the answer to just about every question one could ask about this market right now. It gives us such a beautifully clear picture of market reaction levels.
Let's dive right in and take a look. I think you're really going to like what the chart has to say about where we're headed.
I sure do...
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In last week's trading, we broke above a really, really important resistance level.
After testing 2,600 for four trading days, the market broke through the key resistance level set out by the lows in October, November, and December.
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More importantly, the price action has been 100% above that level ever since. The action has been very convincing from a technical perspective, and that's a good thing for bulls.
You'll recall that I often remind us about a key fact on support and resistance - when price cuts right through one of these key levels (meaning no bouncing back and forth above and below), it signals that the level was in fact important. Once defeated, key resistance becomes support. In this particular case, we haven't moved high enough above the level for the bulls to declare victory just yet, but this is a very good start.
So, the $64,000 question: What's next?
Now that the market is in the process of putting 2,600 in the rearview mirror, the zone from 2,800 to 2,815 now looms large in the windshield as the next resistance level.
In fact, that zone should draw price like a magnet, though with the turbulent news-driven price action, it could take a bit of extra "oomph" for the market to reach up and test that next important resistance level.
The short-term support level that was put in on Jan. 3 - and we drew in for the first time last week - has moved up the ladder as a more important level. A break below 2,600 that holds above 2,450 will serve as a springboard for the bulls.
Of course, the real downside test is still at the Christmas Eve through Boxing Day lows. But with that level now more than 10.5% below where price is trading on Friday morning, a trip back there would be a mighty ferocious drop of the kind that, fortunately for everyone's nerves, doesn't happen all that often.
The bullish case gets even stronger:
You can see here that short-term volatility, while it hasn't exactly fallen off a cliff, certainly continues to shrivel - a sign that the bulls are in control for now. As you can see on the chart above, we're at the lowest volatility levels we've seen since early October - and a little less than half of where we were during the furious selling in December.
Ultimately, this break of 2,600 has changed the tone of the market.
Earnings season, which is getting into full swing, will give us some good information on how individual companies are seeing the economic outlook, and the aggregation of that info will give us some guidance for post-Brexit, post-tariff war expectations.
The bottom line: It's time to pivot to a slightly more bullish trading stance, or for lack of a better word, "less cautiously optimistic," adding at least a little risk. We're not in "dive in with both feet" territory yet, but were certainly closer than we were just two or three weeks back.
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