US markets have climbed to new highs for the year, in line with our analysis of two weeks ago. The Nasdaq and S&P 500 are now bumping into the overhead resistance area formed by last year’s highs. Of course, most traders see that and most traders expect some kind of pullback soon. Will we get it? Let’s have a look at the Nasdaq chart:
We may see a test of the 5000 level in the coming days. But bearish divergences have been shaping up in both the Earl and MoM indicators, while the slower Earl2 (orange line) is clearly headed down from a major peak. So, the chances for a sudden pullback are high and this is not an attractive setup to enter the market for those who are still looking to get in on the long side. In the best case we may get a sideways chop until the indicators are back in the bottom zone. Equally likely is a drop to 4700 or so.
My reversal levels are still positive for most stocks and stock indexes, but that doesn’t mean everything will keep going up in a straight line. In fact it could be a good strategy to get out at this point and buy back after a pullback, or on a breakout above the 2015 highs. In the latter case you would be buying the stocks more expensive than you sold them, but then you would know the market is continuing upwards and the overhead resistance is out of the way.