Lots of Good Things Happening

The question from last week's technical review was whether or not the stock market was "breaking out" to the upside. I noted that while the S&P 500 did indeed appear to be making a run for the border, there was little in the way of confirmation from the other major indices and that even the mighty NDX (Nasdaq 100) was showing signs of being stuck in a range.

The concern was that unless we got some confirmation, stocks might be set up for the dreaded "breakout fake out" where traders try to "ride the range" by "selling the rips" and then waiting for lower prices to "buy the dips."

While we don't appear to have a table-pounding situation yet, the good news is the bulls did appear to get some all-important confirmation over the past week.

But before we get to that, let's take a look at the state of our trend board.

The State of the Trend Indicators

The Trend board indicators are designed to determine the overall technical health of the current stock market trend in terms of the short- and intermediate-term time frames.

The Trend board has backed off a smidge from last week's perfect 10.0 reading as the Cycle Composite (a mashup of the 1-year, 4-year Presidential, and 10-year decennial cycles) suggests lower prices this week. The good news is that after this week, the Cycle Composite points higher through early September - a time when the traditional "fall swoon" tends to kick in. However, given the fluidity and all the variables of the current environment, I'm taking the cycle status with a hefty grain of salt.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.

My Take on the State of the Charts...

As I been saying for the past few weeks, one of the most positive things a market can do is to break out of a range. And as the chart below clearly shows, the S&P 500 has broken out and looks to be embarking on another up leg. And unlike last week, today I can opine that there is confirmation among the major indices as well as our momentum indicators. And the bottom line is, this is a good thing.

S&P 500 - Daily

Last week, I was concerned that the market darlings - aka the Nasdaq 100 - looked to be stuck in a range. And while the small- and mid-caps have been outperforming the NDX of late, I think we can all agree that the index remains in an uptrend. Also a good thing.

Nasdaq 100 - Daily

Speaking of good things, it is also positive that the smallcaps, as defined by the Russell 2000, looks to have broken out of its recent sideways trading range and is beginning a new uptrend. Check out the chart below.

iShares Russell 2000 ETF (IWM) - Daily

Next, let's check in on the state of the market's internal momentum indicators.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.

Once again, there is a positive change to report on the Momentum Board this week as our intermediate-term breadth thrust indicator moved up into the green zone. And with the hypothetical historical average return of the S&P 500 given the current state of the models sitting at roughly double the S&P's mean since 1980, it isn't much of a stretch to suggest that the market has some momentum behind it. Sure, I'd like to see more strength in several of the component model readings (particularly the Intermediate-Term Breadth Model). But the key is to recognize that the rally does appear to be "broadening out" and the internals are confirming. Which, of course, is also a good thing.

The Bottom Line

Given that stocks are clearly overbought and as such, ripe for some sort of a pause in what can only be described as a joyride to the upside, we shouldn't be surprised if some sort of downside testing were to occur at some point soon. But given that there is now some confirmation for the bulls to hang their hats on, I think it is best to give the uptrend the benefit of the doubt and to continue to implement a strategy of buying the dips.