Why The Market Is At An Inflection Point

By Gregory Clay

Monday, April 24, 2017 10:33 AM EDT

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the overall stock market trend.

We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. Last week’s comment “…the Momentum Factor ETF remains stuck in an almost two-month long trading range. Eventually, there will be a breakout, but the question is will it be an upside or downside break…”

The updated MTUM chart below is at an inflection point. You can see the current bullish trend is starting to pierce through the top of the current six-week trading range. This week we should find out if the trend continues with a confirmed breakout or if it retrenches and stays range bound.

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market “breadth” indicator used to gauge the internal strength/weakness of the market.

Like many of the technical market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. Nasdaq stocks have been leading the market direction for the past year. Last week we noted, “…the Nasdaq Composite Bullish Index (BPCOMPQ) continues to break down until we get a confirmed recovery bounce the overall stock market will probably continue trending sideways…”

As you can see in the updated chart the BPCOMPQ is beginning a recovery bounce. We are looking to see the index moves above its 200-day moving average at approx. 62 to signal a break higher out its current trading range. There is a lot of overhead resistance, but as mentioned above the Nasdaq has been the market leader and if it breaks out the other major indexes can be expected to follow.

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