The broad market continues to gain ground, cutting through obvious resistance levels while defying bearish predictions and weak sentiment. The uptick is reminiscent of V-shaped reversals in past years, sustained by nearly complete algorithmic control of price action. However, there are technical reasons for the advance because many securities hit key price levels or cyclical turning points in December, predicting stronger-than-expected first quarter price action.

Federal Reserve caution and trade deal optimism are driving the upside as well, shaking out short sellers and disbelievers while allowing the market to climb the "slope of hope." However, the Fed is more predictable at this point than a disruptive president who is being criticized by his followers for compromising with the opposition. This does not bode well for a bullish outcome in the China trade talks, which are scheduled to end in less than four weeks.

Stronger-than-expected jobs and economic data are also lifting spirits, showing few signs of the slowdown anticipated by market analysts in the second half of 2018. Many American businesses continue to report robust sales, making it more likely that they will add employees in the coming months rather than tighten their belts with staff reductions. Of course, that could change with no China deal, so it's best to think twice before buying stocks or adding to long positions at these lofty levels. 

Technical chart showing the share price performance of the SPDR S&P500 ETF (SPY)
TradingView.com

The SPDR S&P500 ETF (SPY) has mounted resistance at the 200-day exponential moving average (EMA) in the past week after climbing back above October and December lows in January. The last three moving average penetrations (gray boxes) dampened upside momentum, setting major highs into place. As a result, price action above $270 should be watched for a similar exhaustion event, keeping in mind that a rally into the December high at $280.40 would significantly improve the technical outlook.  

Technical chart showing the share price performance of the iShares Russell 2000 ETF (IWM)
TradingView.com

The iShares Russell 2000 ETF (IWM) illustrates long-term cyclical forces at play in the first quarter of 2019, with the steep decline into December 2018 reversing at the trendline of higher lows in place since the 2008 bear market. That price level also aligned perfectly with the 50-month and 200-week EMAs, which have also marked low-risk buying opportunities for the past decade.

The monthly stochastics oscillator dropped to the oversold level at that same time and crossed into a bull cycle, predicting six to nine months of relative strength. The turnaround unfolded near the same level as indicator crossovers in 2010, 2011 and 2015, which all preceded rallies to new highs. Of course, it could be different this time around, but bears should play defense until the ticker tape deteriorates.

Technical chart showing the share price performance of Apple Inc. (AAPL)
TradingView.com

Dow component Apple Inc. (AAPL) highlights these technical influences as well, dropping into the 50-month and 200-week EMAs in November. Prior tests in 2009, 2013 and 2016 signaled major buying opportunities, all preceding new bull market highs. However, the extent of selling pressure was greater during the 2018 correction than in prior occurrences, building more layers of resistance that could slow or stall upside progress. 

The monthly stochastics oscillator dropped into the oversold level for the first time since 2013 last month and turned higher but still hasn't crossed into a new buy cycle. Given stalling iPhone sales, what happens next may be instructive for broader price action. Specifically, a failure to complete a bullish crossover may indicate a lack of buying power that deteriorates improving sentiment. That could happen quickly if trade negotiations break off or the president renews his attacks on China.

The Bottom Line

The bounce that started in late December is lasting longer and adding more points than many technicians expected, indicating a potential change in character that favors bulls. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.