Stocks Move Sharply Higher, Reach Overbought Conditions

The major U.S. indexes moved higher over the past week across the board, but there were some signs of economic weakness. For instance, December's retail sales fell a tenth of a point short of analyst consensus forecasts calling for 0.5% growth, and jobless claims rose 11,000 to a higher-than-expected 261,000. The good news is that the overall economy remains largely on track during the fourth quarter and that the lower corporate tax rates could provide a boost to companies' bottom lines over the coming year.

International markets were mixed over the past week. Japan's Nikkei 225 fell 1.18%; Germany's DAX 30 fell 0.56%; and Britain's FTSE 100 rose 0.71%. In Europe, the regional Economic Sentiment Indicator – a measure of optimism among businesses and consumers – rose to 116.0 in the highest reading since October 2000. In Asia, China's premier was upbeat on the economy and projected that it grew about 6.9% in 2017, despite concerns about the country's rising levels of debt that could eventually threaten growth. (See also: China's Economic Indicators.)

The SPDR S&P 500 ETF (ARCA: SPY) rose 1.64% over the past week. After surpassing R2 resistance at $274.13, the index rose to fresh all-time highs over the past week. Traders should watch for a further breakout to fresh highs or a move lower to consolidate above R2 support levels. Looking at technical indicators, the relative strength index (RSI) moved further into overbought territory at 84.12, while the moving average convergence divergence MACD experienced an acceleration of its bullish upswing that could signal greater upside.

The SPDR Dow Jones Industrial Average ETF (ARCA: DIA) rose 2.04% over the past week. After breaking out from R2 resistance at $254.70, the index moved past upper trendline resistance to new all-time highs over the past week. Traders should watch for a further breakout to new highs or a move lower to retest R2 or lower trendline support levels. Looking at technical indicators, the RSI is very overbought at 87.28, but the MACD experienced a bullish crossover that could signal further upside ahead. (For more, see: Stocks May See 30% 'Meltup' in 2018: Bill Miller.)

The Invesco QQQ Trust (NASDAQ: QQQ) rose 1.59% over the past week, making it the worst performing major index. After breaking out from R2 resistance at $162.45, the index moved to fresh all-time highs over the past week. Traders should watch for a further breakout to new highs or a move back below R2 and trendline support levels back into its price channel. Looking at technical indicators, the RSI is overbought at 77.77, but the MACD is still in a robust bullish uptrend that remains intact.

The iShares Russell 2000 Index ETF (ARCA: IWM) rose 2.18% over the past week, making it the best performing major index. After breaking out from R1 resistance at $155.46, the index moved to upper trendline and R2 resistance at $158.46. Traders should watch for a breakout from R2 resistance to new highs or a move lower to R1 support $155.46. Looking at technical indicators, the RSI moved into overbought territory with a reading of 74.20, but the MACD experienced a brief bullish crossover after a long sideways trend. 

The Bottom Line

The major indexes moved sharply higher over the past week, but technical indicators suggest that they might be overbought at current levels. Traders will be keeping an eye on several key economic indicators, including industrial production on Jan. 17, jobless claims on Jan. 18 and consumer sentiment on Jan. 19. The market will also be keeping a close eye any geopolitical developments that could affect stocks. (For additional reading, check out: 5 Global Risks That Could Hammer Stocks in 2018.)

Note: Charts courtesy of StockCharts.com. As of the time of writing, the author had no holdings in the securities mentioned.