Article / 11 July 2016 at 12:41 GMT

Wall Street ready to break records?

Technical Analyst / Saxo Bank
  • S&P 500 faces a clear path to 2,270
  • DJI; Nasdaq Composite also likely to post new highs
  • Russell 2000 unlikely to break upside records

Wall Street
Wall Street appears set to surge to new highs, but small caps may be left behind. Photo: iStock

By Kim Cramer Larsson

Last week we saw headlines stating that we could see stocks at new all-time highs. US stocks, that is – European shares are still struggling. 

US stock indices are fast approaching their all time highs, but can they also take them out?

S&P 500

The rally in US stocks seen Friday took the S&P 500 within a few points of its all-time high.
On the S&P 500 daily chart, the RSI closed just above the 60 threshold indicating a return to bullish sentiment. 

In the short term, there is room up to 2,170-200 which would be the 1,382 and 1,618 Fibonacci projections of the "Brexit market correction". 

S&P 500 Daily

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Source: Saxo Bank

On the weekly chart, we can see how the RSI has been rejected at 60 every time it came close. Last week, however, it closed above – so expect a new all-time high. It is the first time since 2014 that the RSI is above 60 and first time since Q3 2015 that we can see it indicating a bullish sentiment and trend.  

After the Q1 selloff and subsequent rebound back to Q4 2015 highs, we saw a Doji Evening top and reversal signal. A selloff followed up to and around the Brexit vote but the market rebounded again strongly last week taking out the Doji cancelling out the top pattern. 

A Fibonacci projection on the weekly chart confirms the targets from the daily time period – i.e. the 2,230 area – is possible in Q3. 

S&P500 weekly
Source: Saxo Bank

The monthly chart supports the longer-term bullish picture to some degree... RSI is above 60 however, so  we are still seeing still massive divergence. We are seeing no divergence on the MACD, though, and the Bollinger Bands seem to be expanding again.  

The peaks in 2015 sat exactly at the 1,618 Fibonacci projection of the financial crisis. The next level would be 2,270, or the 1,764 Fibo projection. This is very nicely in line with the aforementioned Fibo projection levels. 

S&P500 monthly
Source: Saxo Bank

Dow Jones Industrial

We are seeing more or less the same picture on the DJI, unsurprisingly. (apart from the fact that the daily RSI closed below 60). However, the MACD indicator is pointing higher and the Bollinger Bands are expanding. The uptrend has been confirmed and a Fibo projection indicates target levels at around 18,373-600 in Q3. 

On the weekly chart, the DJI indicated a bullish trend already in April with a close above 60. 
The 1,382 Fibo Projection is at around 18,943, very close to the 1,618 projection from the financial crisis bear market at around 18,974.

dji weekly
Source: Saxo Bank

As can be seen on the monthly chart, 18,974 is the 1,618 projection of the financial crisis bear market. It is also very much in line with an article I wrote a long time ago...

In that piece, I was looking for 18,738. However, it is too early to say if we will experience a crash after reaching those levels. There is, however, still massive divergence on the monthly chart. Whether that will be "traded out" – i.e. higher levels on RSI than in 2013 – remains to be seen. 

Could it be that we will see new all-time highs with even more divergence on RSI combined with divergence on MACD? 

This is not unlikely, as I am sure we will see new all-time highs on the S&P 500, the DJI, and the Nasdaq Composite (not shown). 

DJI Monthly
Source: Saxo Bank 

Russell 2000

Small- and mid-caps will have a hard time reaching new all-time highs. The Russell 2000 index is still some 10% from the all-time highs recorded in 2015 and it will face resistance at around 1,200. 

The RSI, which showed massive divergence in 2014 and 2015, is currently testing the falling trendline. After the Doji Morning pattern in Q1, which is a bottom and reversal pattern, RSI will most likely break out bullish. It is, however, less certain that we will see the divergence cancelled – even if we see a new all-time high. 

MACD is close to turning bullish, adding to the bullish reversal picture. 
Source: Saxo Bank 

— Edited by Michael McKenna

Kim Cramer-Larsson is a technical analyst at Saxo Bank
11 July
Tepord Tepord
When we first heard this past Thursday that private blogger and Citadel employee Ben Bernanke was going to "secretly" meet with both the BOJ's Haruhiko Kuroda and Japan PM Abe, we warned readers that "something big was coming."

As noted late last week, "Bernanke will be in Japan next week. It has been arranged for him to meet officials including Abe and Bank of Japan Governor Haruhiko Kuroda, according to a government official speaking on condition of anonymity. Bernanke is expected to discuss Brexit and the BOJ's negative interest rate policy with Abe and Kuroda, the official said." As Reuters added, "Some market players speculate Kuroda might decide, in a surprise, to provide "helicopter money" - a term coined by American economist Milton Friedman and cited by Bernanke, before he became Fed chairman, when talking about how central banks might finance government budgets as a way to seek to fight deflation."
11 July
Tepord Tepord
We concluded as follows:

So is it time? Is Bernanke about to unleash the next, and final, monetary policy evolutionary step, one which launches "helicopter money" in Japan, and if successful, brings it across the Pacific to the US?

We don't know, but if anyone is still holding on to USDJPY shorts, now may be a good time to quietly close them out, because if Reuters is right, and a "helicopter money" is about to be served for the first time in modern history, things are about to get very volatile, very fast.


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