It’s been a long and arduous climb.
Since the beginning of the year the S&P 500 (SPY) has managed to push 8.2% higher.
But the low-volume rally seems to be stalling and a short-term reprieve looks likely over the next few weeks.
The strong trend that has occurred since the beginning of the year has officially reached an extreme.
The best way to see this is through the technical indicator known as the Average Directional Index (ADX). ADX was developed by J. Welles Wilder, the same gentleman that founded my favorite indicator RSI. ADX indicates trend strength, it measures the persistence of a trend.
A strong trend is recognized when ADX moves above 40 and as we can see from the chart below the S&P 500 has reached that level.
There have been several strong trends over the past 10 or so years and almost every time the trend becomes this strong a short-term reprieve follows.
But what I find truly interesting about this latest reading is the fact that it is only the second time in a decade that ADX has reached this type of extreme during an uptrend. The other occurrence was 11/18/04.
The major market benchmark managed to push higher for roughly a month after that reading back in late 2004, but it gave back all of the gains and more over the following six months.
(Chart courtesy of sentimentrader.com)
The reason I mention this is just to prepare us for what’s in store. Typically, these types of gains just aren’t sustainable over such a short time frame particularly when they occur in a low-volume environment.
Editor and Chief Options Strategist