Yesterday morning, the S&P 500 cash index came within 0.86% of its Sept. 21, 2018, all-time high. The market has been on a wild tear for almost four straight months now, rocketing more than 24% off the low set on the first trading day after Christmas Eve.
So the way forward to fresh all-time highs is free and clear... right?
Well, not quite. The overwhelming strength of the market is precisely what will, for the time being, keep it from convincingly busting through the highs set seven months or so ago.
It's not that there's anything mechanically wrong with the market or the economy; both are relatively strong.
Instead, it's got everything to do with the psychology of the people, of the buyers and sellers who constitute the market.
Understanding what's happening is the key to being in the right place (ready to make money) at the right time (when the market rockets higher again).
Here's what's happening...
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The "Fence" Is Getting Mighty Crowded
Traders and investors are indecisive right now when it comes to future direction.
On the one hand, they're wary about a bull run that has gone so far, so fast, and they have an itchy trigger finger, just waiting to take profits. On the other hand, there's the fear of missing out (FOMO) should the market keep climbing like it has for all but a few months of the past 10 years...
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And that indecision, or split-mindedness, will most likely mean that the S&P 500 will meet some resistance the first couple of times that it tests the old highs.
In addition, we have a rising wedge pattern that has drawn some recent attention:
The pullbacks during the post--Christmas Eve rally have all been shallow. We've even had some overbought situations work themselves out by a period of sideways trading. That happened when we cleared the two most important resistance levels on the way up:
It also took the market multiple days - and multiple tries - to get through the 2,600 and 2,800 to 2,815 resistance levels.
I expect we'll see the same action as we approach 2,940.
Here's What It'll Take to Reach That Magic Number
I'm expecting the market to have technical struggles breaking through the 2,940 level and staying there.
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But importantly, the "rest" the bull spirits take while banging their heads against that important level will only serve to make the ultimate move higher that much stronger - especially in the short- to intermediate-term time frames.
Why the extra "kick?"
Well, we're in a seasonally strong period. April has been the strongest month of the year for the past 20 years. And as we can see from the chart below, courtesy of LPL Financial's Ryan Detrick, most of the gains have come in the second half of the month.
Market breadth - the number of stocks participating in upward moves - is generally healthy and strong right now across the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite. That's a very good sign of bullish moves to come.
And last, but certainly not least, is the power of earnings. After a slow start, we're beginning to see more and more key revenue beats and fatter profit margins. Today, we'll hear from Facebook Inc. (NASDAQ: FB), Microsoft Corp. (NASDAQ: MSFT), and Amazon.com Inc. (NASDAQ: AMZN). Those stocks are like freight trains for pulling reticent markets higher - especially with the power of positive numbers in the tank.
I'm not alone in my optimism for fresh highs, either; the head of the largest money management firm in the world sees a higher probability for upside here, and he told CNBC as much:
The rally in global equities may have further to go as more money jumps back into the market, BlackRock CEO Larry Fink said Tuesday.
"We have a risk of a melt-up, not a meltdown here. Despite where the markets are in equities, we have not seen money being put to work," the head of the world's largest asset manager told CNBC's "Squawk Box." "We have record amounts of money in cash. We still see outflows in retail in equities and in institutions."
So what should we do?
My analysis says that pullbacks are still to be bought, and we should get a few chances to add to our positions in quality stocks as the market works through this next level of resistance before breaking through the ceiling. We'll look mighty smart for having done that when the melt-up begins.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.