Dow Jones Composite and S&P 500 staged a strong reversal off support levels yesterday and today’s gap up shows how bullish many people feel today in pre-market. Dow and SPX are both near their all time highs and as long as downward moves do not break previous lows, the chance of making a new higher high is increased. Yes support levels were held and a strong bounce followed. However we have to note that an important divergence in the Russel 2000 performance so far makes us remember the end of the summer of 2011, where Russell 2000 declined before market plunged lower.
Russell 2000 is showing weakness signs and my technical view for this index is negative. Price is making lower lows and lower highs. Price has broken the upward sloping trend lines and is below the Ichimoku cloud after back testing it and being rejected. Russell 2000 also was the leader in August 2011 when markets made a sharp decline and currently there is a strong divergence between RUT and SPX as shown below. The past behaviour of one following the other makes me skeptical on what could happen now. Will SPX turn lower or will RUT bounce back up to cover lost ground?
My view is that yes S&P and DOW can make new higher highs, but I feel that they are going to be marginally higher and not a new upward move. This is because RSI divergencies are evident for some time now and I do not think the conditions are ripe for a new bull market move of more than 30 points in SPX.
Another diverging market that makes me worry is Nasdaq. As shown in the chart below it has tested the 3500 support level I mentioned through my twitter account and closed above it, but still inside the Ichimoku cloud and below the red downward sloping trend line resistance and below the 61.8% retracement.
So what is the market going to do? My feeling is that a downward deeper than normal correction will happen during May. The divergencies in the RSI and the bearish signals by NASDAQ and RUT make me worry that SPX and DOW will follow. Concluding I’m still bearish despite making another run to our previous all time highs. I believe we are going to see SPX below 1800, but this decline will be a great buying opportunity for the longer-term. My portfolio management plan now is 30% long equities, 10% trading short positions in ES futures and 60% cash.