So Much "Potential" Resistance For America

JC Parets
August 16, 2020

The words "Support" and "Resistance" get thrown around a lot. In most cases, it's stated as fact, "This level is resistance", or "There is support at that price". What is important to remember, however, is that these are only "Potential levels" of support and resistance. We may have evidence suggesting there could be overhead supply near a certain price, but we won't know for sure until after the fact.

Today I want to talk about how many Indexes in the U.S. are approaching "Potential" Resistance.

Let's take a step back and define what that actually means. Resistance is when there is an overwhelming amount of selling pressure vs buying pressure. There are more sellers, than buyers (or as the smart ass in the corner will mention, it could be one giant seller and not necessarily more of them, but I digress). Bottom line is, that Resistance is the price where there is more supply for an asset than there is demand for it.

The first obvious one is the S&P500 getting back to its February highs:

Click on Charts to Zoom in

You see, in this case, the market proved in February that there was more supply for these stocks than demand. More selling pressure than buying pressure, and so stocks fell from there.

The Wilshire 5000 peaked at the same time and this is now the first visit back to these levels:

The same thing can be said about the IBD 50 Index and their 2018 highs:

Next, here's a look at the Nasdaq 100, Queen of the Bulls, The Breaker of Resistance and Mother of Uptrends. The Daenerys reference is warranted here as we approach these potential White Walkers:

Is this "Potential" Resistance something worth acting upon?

These are the things I'm thinking about.

Here is the hottest leadership group in America, Transportation Stocks. The more times that a level is tested, the higher the likelihood that it breaks. We can argue this is the 4th-5th attempt to get through these levels.

A breakout in the Dow Jones Transportation Average makes it really hard for me to approach the market from a bearish perspective.

Another interesting case to be made is that the Mega Cap 300 Index has already broken out. If they're above those former highs, it's hard not to bet that the others will follow:

Look at the Momentum Factor ETF $MTUM holding above those former highs for a while now:

Like the Mega Caps, the time to start to get cautious is if we break back below those former highs. It will look a lot like October 2018, if they do.

That's what we're watching for. The breadth continues to improve and we keep seeing signs of expansion of breadth, NOT deterioration. When it comes to identifying potential resistance in uptrends, turning points tend to be preceded by weakening breadth (like in February). This is not one of those times.

The good thing is that none of us know what's going to happen next. We want to take the weight of the evidence and decide, OK, do we want to spend our time looking for stocks to buy, or should we spend our time looking for stocks to sell?

It's been the former for a while now, and I'm not seeing any evidence that suggests changing that strategy. If US 10-yr yields break back below 60 bps, the momentum factor and large cap indexes fall back below their former highs, and Transports DON'T break out to all-time highs, then come talk to me about getting aggressively short.

I just don't think we're there right now. Not based on our data and our work, anyway.

We'll discuss this all Tuesday night on our Monthly Conference Call (Premium). You can register for that here, if you haven't already.

And if you can't make the call live, don't worry, both the Video and Slides to Download will be available here by Wednesday morning.

See you then!

JC

 

 

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