Don't Fret the Volatility, These Charts Signal Rally Can Go On

  • Technology leadership remains supportive for stock gains
  • High-yield market seen key indicator to test recent pullback

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After the surge in U.S. stock volatility in recent weeks, bull-market believers can take heart from a number of technical signals embedded deep in the market.

Positive momentum indicators, a benign high-yield market and the continued leadership of technology stocks that propelled gains last year offer some comfort to market participants including Bank of America Merrill Lynch’s veteran technical analyst Stephen Suttmeier.

As investors grapple with the implications of trade restrictions and a U.S. central bank committed to normalizing policy, these signs may provide some support despite volatility at double last year’s level. The S&P 500 Index closed up 1.1 percent Monday, the 16th time this year it has moved at least 1 percent -- more than double the entire number for 2017.

Here’s a look at some of the key charts traders are watching:

Positive Tech

The Nasdaq 100 is up almost 8 percent in 2018, compared with about 2 percent for the S&P 500. This doesn’t suggest risk aversion and is a bullish signal as long as the index remains above its 200-day moving average and the low reached in February, said BoFAML’s Suttmeier.

Momentum Indicators

The Williams %R indicator, a measure of overbought and oversold levels that tracks the closing level of an index relative to recent highs and lows, remains above its trend line from August 2015 -- a signal the rally hasn’t broken down.

According to Suttmeier, the relative strength index is also signaling a cushion for bullish investors, with technical support around 28 for the 14-day RSI.

Junk Bond Canary

Junk bonds are being closely watched by stock investors as they can often be a leading indicator of market distress. The ICE BofAML U.S. High Yield Index has so far stayed above its 1244 support level. A drop below that level could increase the risk of a deeper pull back on the S&P 500.

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