Bottom Line:
First, from last weekend’s Report:
The NDX/RUT ratio is at all-time highs. At a minimum, the rate of change of this ratio is very unlikely to continue.
The breadth of the US stock market is not consistent with sustained bull runs lasting multi-months or years. This can very quickly change and if breadth begins to expand the broader market and indices could fuel much higher prices. If this were to occur it is likely the ratio of outperformance in the NDX vs other indices is likely to narrow to some degree.
With the SPX right at the 4200 level that is a MAJOR inflection point, carefully watch price action next week. Last week’s low in the SPX at 4104 is the critical downside level that must hold under any immediate bullish scenario.
The RUT is in a tight, 2 1/2-month Balance Area. It is the index most highly correlated with NYSE market breadth. As Breadth goes, so will go the RUT.
The RUT closed above the critical 1817 level. The SPX had its widest range day in three months. The DOW rose dramatically, breaking the lower lows and highs pattern it has been in since early May. Breadth expanded and closed at its highest level since May 5.
Friday’s cash session lows in the SPX, RUT and DOW are now the important downside levels in those three indices. In the NDX it is Thursday’s low that is of immediate importance. IF Friday was a kickoff to a broad market bull run those levels should hold, and any retracement into Friday’s ranges (the Thursday- Friday range in the NDX) should be relatively shallow.
It would not be at all surprising to see the NDX underperform for a while.
NDX
The NDX is up 35% for the year. It may certainly go a lot higher, but it is extremely doubtful to continue at the same torrid rate of change. It was interesting that on Friday it underperformed, and that may be the signal the other indices and broader market will begin to catch up on a relative basis that may include the NDX continuing higher, but underperforming the other indices.
Upper KRA: 15115-15272
Lower KRA: 14216
SPX
The SPX closed Friday just below the 4300-4327 KRA that includes the August high. I would be surprised if this level holds.
Upper KRA: 4300-4326; 4498-4527
Lower KRA: 4165
RUT
Friday appears to be an important breakout in the RUT. If so, the gap created should not be filled for the foreseeable future and any retracement into Friday’s range should be relatively shallow.
Upper KRA: 1875-1887
Lower KRA: 1813-1805
DOW
The DOW exploded higher with the other indices on Friday but has not cleared its equivalent immediate upper KRA.
Upper KRA: 34328-34730
Lower KRA: 33187
Internals
There have not been three consecutive positive closing days in breadth since the end of March. That should change under the present bullish assumption. If Friday was a bullish breakout in the RUT we should expect a streak of 5+ consecutive days of closing breadth. Obviously this would bode well for higher prices next week.
Neither the 10-day nor the 5-day MAs of NYSE advancing issues is at an extreme.
30m SPX/Breadth
There is a lot of information on the chart below. The breadth kickoff to the current rally appears to have actually been on March 14. Breadth has not exceeded the upper level reached that day. The SPX rallied into March 31, then stopped on a dime (Step 2 in the Auction Market Process of Development) and transitioned into a multi-week Balance Area that included both a false breakdown and false breakout. You will seldom find a more difficult or confusing market period than the past two months.
Downside levels to watch are well established.
VIX
VIX collapsed on Friday to 14.60. This is the lowest VIX reading since February 14, 2020, two days before the pre-pandemic top in the US stock market.
The huge difference between then and now is that we appear now to be breaking out to the upside in the broad market rather than at the end of a relentless run as proved to be the case then.
Thoughts:
Bias should be to the long side in all time frames into late next week. Under this assumption any retracement into Friday’s ranges in the stock indices should be shallow and short-lived.
US 10-yr Notes
Friday’s wide range down day suggests favoring shorts.
US Dollar
Consider longs against Friday’s low.
Gold
Crude
