S&P 500 Momentum Points to a Rally Potentially Lasting Into Mid-July

The lower panel shows the daily SPY, while the upper panel displays the NYSE McClellan Oscillator. Market bottoms typically form when a “Selling Climax” is followed by a “Sign of Strength.” In McClellan Oscillator terms, a Selling Climax occurs when the indicator falls below -200, while a Sign of Strength is triggered when it rises above +200.

For a market bottom to form, the McClellan Oscillator typically needs to move from -200 or lower to +200 or higher within 30 days or less. In the lower panel, the dotted red lines mark instances when the Oscillator dropped below -200, while the blue dotted lines indicate when it climbed above +200 within the required timeframe.

Heading into the March low, the market experienced a “Selling Climax,” followed by a “Sign of Strength” after the low was established, confirming a market bottom. The current rally may extend into mid-July, with the ongoing consolidation potentially representing the halfway point of the upward move.

We updated this chart from yesterday, and the prior commentary outlined why the current consolidation could represent the halfway point of the ongoing advance.

“Last Thursday, the 5-period RSI climbed to 88.41, while the 14-period RSI reached 78.69. Historically, an RSI (14) reading near 80 and an RSI (5) near 90 — with last Thursday’s readings falling just 1.5 points short of those bullish thresholds — signals strong market momentum rather than a final market top.

Since 2002, the RSI (14) has reached 80 only eight times, roughly once every three years (as highlighted on the chart above). In many of those cases, an RSI (14) near 80 has coincided with the midpoint of a broader upward move.

This week also leads into a three-day holiday weekend, with markets closed Monday for Memorial Day, which could result in lighter trading volume as traders step away early. Pullbacks on lighter volume are typically viewed as constructive for the broader bullish trend. While some near-term weakness is possible this week, momentum indicators continue to point toward higher prices following the holiday.”

The chart above shows the monthly GDX alongside the GDX/GLD ratio in the lower panel. Since January, GDX has been trading within a broad range, with resistance near 118.00 and support around 80.00. Current analysis suggests this consolidation may represent the midpoint of a larger bullish advance. If that view proves correct, GDX could eventually rally toward the 200.00 area.

The key to this outlook lies in the monthly GDX/GLD ratio shown in the lower panel. This ratio has spent the past 13 years moving sideways and now appears poised for a potential breakout. The critical breakout zone sits near 0.20, which is where the ratio is currently trading. Importantly, the ratio has not been retreating from this resistance level, suggesting supply is being absorbed. Once that supply is exhausted, the ratio could begin a sustained move higher.

The next major upside resistance for the ratio is near the 2010 highs around 0.40. Even if gold prices remained unchanged, a move in the ratio toward 0.40 could lift GDX toward the 180 area. However, with gold also expected to advance alongside mining stocks, GDX could ultimately trade substantially higher.

A major upside move in GDX may be developing, although the current consolidation phase could continue for several more weeks before the next leg higher begins.