Charts Point To Another 5%-7% Advance Before A Correction

All major U.S. indices were higher last week, led by the previously downtrodden Nasdaq 100 (+2.5%) and Russell 2000 (+2.1%). Both of these market-leading indices must continue to outperform the broad market S&P 500 if last week’s strength is going to become the next leg higher within the larger 2013 stock market advance. The major indices are now all in positive territory for 2014 except for the small-cap Russell 2000, which ended last week down 3.2% for the year.

#-ad_banner-#From a sector standpoint, my own asset flow-based metric shows the largest inflow of investor assets over the past week went into consumer discretionary, which led all sectors with a 2.1% gain. The utilities sector had the biggest outflow of investor assets and, as would be expected, was the only sector to lose ground for the week.

Is Technology Leading the Blue-Chip Stocks Higher?
Beginning in the April 21 Market Outlook, and again in several subsequent issues, I have been discussing overhead resistance at 3,617 on the Nasdaq 100 and stating that a rise above this level was necessary to indicate that this market-leading technology index’s larger November 2012 advance was resuming. 

After negotiating this level for the past month, 3,617 was significantly broken to the upside last week. This clears the way for more near-term strength and a potential 2% rise to retest the 3,738 early March high.

More recently, in the May 12 and May 19 Market Outlooks, I identified an emerging pattern in the SPDR Dow Jones Industrial Average (NYSE: DIA), commonly known as the “Diamonds.” The formation was a triangle, indicating investor indecision, and I said, “For the bullish implications of the pattern to remain valid, the lower boundary at $163 must contain DIA on the downside this week while it rises back above $165.51 — and stays there.”

DIA traded as low as $163.04 last week before rebounding to close at $165.83, near its highs of the week. As long as $163 continues to hold as support, the pattern will target an additional 7% advance to $177.

In last week’s report, I said: “If the 2013 advance in stocks is still healthy and intact, the next leg higher should begin during this period via a rebound in the Russell 2000 from support near 1,080 and a sustained move above $166 in DIA.” 

The Russell gained 2.1% last week, and DIA is challenging $166. These near-term positives for the stock market suggest an additional 5% to 7% advance may be in store for the major indices before the potential emergence of a corrective decline during the third quarter. 

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Charts Point to Another 5%-7% Advance Before a Correction