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Midweek Market Trend for July 18, 2018

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Could this be the week when the S&P 500 (SPX) finally breaks out of its multi-month trading range?  As of right now (2 PM Eastern July 17th) it looks like that might be the case (Figure 1). Of course it will be more important for the SPX to end the week above the 2800 level to validate the breakout. 

Figure 1: 

Source: StreetSmart Edge®

Here are some items to keep your eye on going forward.  The odds are higher for the breakout to “stick” if the equal weighted S&P 500 can breakout too (SPW).  At the moment it is still at the top of its range (Figure 2).

Figure 2: 

Source: StreetSmart Edge®

 Also, watch to see if any pullbacks in the SPX can hold the 2800 level, since broken resistance should act as support if the breakout is going to succeed.  One area of potential concern is the action of the Russell 2000 (RUT). It had been the relative strength leader of the major indices until the beginning of July (Figure 3) (A).  There was also a momentum divergence at its recent high, as the RSI was lower than it was at the June high (Figure 3) (B). Sometimes such a divergence leads simply to a short term pullback to support, which we may be seeing as the RUT tested its 50- day moving average (Figure 3)(C) Other times, though, such a divergence can be a warning of a trend change.  Finally, we are entering the “heart” of earnings season and things could change quickly, so it pays to be vigilant.

Figure 3: 

Source: StreetSmart Edge®

Turning to sector action, the banks look interesting. Earnings so far have in most cases have met or beaten estimates despite the flattening yield curve. The sector has formed a classic triangle consolidation pattern on the weekly chart.  Look to see if they can have a weekly close above the upper trendline (Figure 4).

Figure 4: 

Source: StreetSmart Edge®

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