Can The Stock Market Bulls Pass This Test?

Before the monthly jobs report on Friday it seemed that only a weaker-than-expected jobs report might boost stocks. After the sharp market reversal on Wednesday in reaction to Fed Chairman Powell’s comments stocks were hit hard again from Thursday’s open. The S&P 500 dropped below the widely watched level of 3700 in early trading and the Nasdaq Composite declined 1.7%.

The jobs report came in a bit better than expected and that did not help the market’s tone as stocks sold off Friday morning and dropped back to Thursday’s lows before lunch. Technically it was a good sign that those lows did hold as the S$P 500 had a low of 3708.94 on Friday which was above the Thursday low of 3698.15.

By the close at 3770.55 over 60% of the S&P 500 stocks were higher for the day. On the NYSE there were 2250 issues advancing and just 915 declining. For the week the NYSE A/D numbers were negative and despite the 1.4% gain for the S&P on Friday, it was an ugly week with lots of red on the weekly summary.

After the rough earnings season for many of the large technology stocks, it was not surprising that the Nasdaq 100 dropped the most down 6% as it closed the week down 33.5% year-to-date. By comparison, the 3.4% decline in the S&P 500 was not too bad. The Dow Jones Industrial Average only declined 1.4% as early in October the relative performance analysis indicated it was leading the S&P 500.

The iShares Russell 2000 (IWM IWM ) was under pressure as it dropped 2.5% while the losses in the Dow Jones Transportation and Dow Jones Utility Average were minor. The SPDR Gold Shares were higher Friday and up 2.2% for the week though down YTD. The more broadly based NYSE Composite was down just 0.62%.

The patterns from the daily advance/decline lines do suggest that Friday’s gain was significant and that stocks are ready to move even higher ahead of the CPI report on Thursday. The Spyder Trust (SPY PY SPY ) dropped below the monthly pivot at $374.61 on Thursday and Friday but then closed above it at $376.35. A strong close above the resistance at $389.90 (line b) would set the stage for a further rally into the end of the year.

The S&P 500 Advance/Decline line has dropped back to its rising WMA before turning higher Friday with the positive A/D numbers for the day. This is often a very bullish setup when the WMA is rising. It requires strong A/D numbers early in the week which could move the A/D line above its recent highs ahead of prices. If instead there are weak A/D numbers it could turn the A/D line lower and drop it below its WMA.

Even though the Nasdaq 100 ($NDX) has been one of the weakest market averages it also shows positive signs as after dropping below the monthly S1 support at 10,670 it closed up 1.56%. The declining 20-day EMA at 11,192 and the monthly pivot at 11,176 are the next barriers on the upside. There is key resistance at 11,712, line a.

The Nasdaq 100 Advance/Decline line broke its downtrend, line b, on October 24^th which indicated the decline from the August high was over. The A/D line dropped below its WMA on Wednesday but then closed back above it on Friday. This is another potentially bullish setup but needs positive A/D numbers early in the week to confirm

Yields rose late in the week with the 2 Year T-Note yield making a new high Thursday and Friday. It reached my chart targets from early in the week but then closed lower Friday. This was a factor helping stocks to rally though the market internals were already positive early Friday even though prices were lower.

If rates move sharply higher early in the week then it will be more difficult for the bulls to complete the stock market bottom. I am watching the 2 Year T-Note yield for a close below 4.268% or a violation of the support at 3.911% in the 10 Year T-Note yield to confirm a top.

There are many stocks and ETFs that are showing up on my bullish scans. Stericycle SRCL (SRCL) closed on Friday, October 24^th at $44.17 well above the prior week’s doji high of $42.58. This triggered a weekly buy signal and was accompanied by the move in the weekly OBV above its WMA.

SRCL was up 6% last week and the relative performance (RS) moved above its WMA indicating it is a market leader. The OBV has moved further above its WMA and the resistance at line b. The August high at $55.31 is the next upside target.

If the stock market is strong this week with positive A/D numbers I think the outlook will become much more bullish. Until then be sure to target your buy areas carefully and watch the risk on any new positions.