Quiescence

The entire second half of July 2016 for US equities can be summed up in the title to this post. Its very rare that the market will spend such an extended time locked within a <1 percent range. Its actually historic. The tight range, coming off the Brexit bounce, is most evident on the 30 minute chart below.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

Looking at the daily chart, its easier to see just how narrow and tight the market range is; just look at the congestion! Its pretty remarkable!

S&P 500, daily bars

S&P 500, daily bars

Its not easy to interpret what it means technically for the next few months. However, the sluggishness does suggest that the market has more to digest, and may require deeper consolidation or correction in order to move substantially higher. The technical and fundamental obstacles to a further rally are many and varied, and I won’t go into them all here.

However, one item that we should consider is the fact that August has been the weakest month of the year since the 2008 Financial Crisis, falling an average of 6 percent. While this doesn’t mean we’re on the edge of a precipice, we should be ready for weakness. The late summer doldrums are typically a time to be cautious on equities before the fall buying season heralds the beginning of the strongest six month stretch of the year from November-April.

Whatever the case, traders should be ready for anything, with a break to the upside just a likely as a break to the downside. The only certainty is that this period of quiescence won’t last forever.

Summer Break

With the summer doldrums upon us once again, the markets have made valiant if underwhelming progress toward the May 2015 all time highs. Despite this, the move higher in the past 3 weeks has been considerably less systematic and considerably more erratic that the bulk of the recovery from the February 2016 lows.

Lingering doubts regarding the strength of both US and global growth, weak headline Job creation numbers, the prospect of Fed rate tightening and possible Brexit are all taking their toll. Not surprisingly, equity indices have given back gains of late. The big question on our minds is, do we go lower from here, or does the market reverse and continue up the wall of worry?

With multiple schools of thought on the issue and the charts less compelling than they frequently are, investors are faced with difficult choices when putting new money to work. Below are some charts with analysis to help identify key levels that may help provide clues for how best to position next.

SP-50030minute2016.6.14

S&P 500, 30 minute bars

SP-500daily2016.6.14 SSOhourly2016.6.14 SSO2day2016.6.14 SDS30minute2016.6.14 SDSdaily2016.6.14

Rollover

Over the past week, the markets have shown a listlessness that they haven’t exhibited since last December. While its possible we’re looking at exactly the kind of consolidation needed to prepare for another leg towards the all time highs, its equally if not more likely we could be looking at the weakness that often precedes a significant drop, of the type we saw back in August of last year.

Seasonally, we’ve reached the beginning the the weakest six month stretch of the year, with the S&P 500 just off of its post-February highs. While a major drawdown is not necessarily imminent, below is a set of charts that outline the dizzying technical confluence of trend-lines that remain in play as the market pauses.

S&P 500, hourly bars

S&P 500, hourly bars

S&P 500, daily bars

S&P 500, daily bars

SDS, 30 minute bars

SDS, 30 minute bars

Keep your stops tight, and good luck out there!

Staircase

The S&P 500 today rebounded after breaking down below the lower trend channel bound of the recent ascending range its moved in for the past few weeks. What seems to be happening now is the process of re-establishing a new “downshifted” range in which the index can move higher gradually up the staircase towards a top. We are reaching the late stages of the move off of the February lows, and a new basing process will have to take place to set the stage for continued motion towards the all time highs.

This process can take a number of forms, with a sharp selloff or a long period of sideways motion being two possible scenarios. Are the process begins, I’ve assembled a set of charts below to help put the technical picture into perspective as I see it. I’ve also taken the liberty of including the charts of a couple ETFs that track the S&P 500 to add new perspectives on my favorite index. As always, I do not endorse or recommend any of the funds or investments below.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

S&P 500, daily bars

S&P 500, daily bars

SSO, 30 minute bars

SSO, 30 minute bars

SSO, daily bars

SSO, daily bars

SDS, 30 minute bars

SDS, 30 minute bars

SDS, daily bars

SDS, daily bars

Tag

Continuing the string of gains off the lows in February, the S&P 500 has finally tagged the 2100 level for the first time since December 2nd. Drilling down to the near term movement, the rallies of the past few trading days has taken the index to the top of its recent rising range. Within this pocket at the top of the channel, the market has generally found a place to cool off before pulling back to consolidate in the pocket at the lower end of the rising channel.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

These points at the extreme edges of the range (within the “pockets”) have provided good entry and exit points for swing trades in the recent past. Beware, though, that these trading ranges develop and break down rapidly, and often with little advance notice, so if playing the levels, be sure to select entry points carefully and apply tight stops. If (really when) the range breaks down, you’ll know pretty quickly that the structure is breaking down, and that its time to get out and re-evaluate.

S&P 500, daily bars

S&P 500, daily bars

Still, the channels often last long enough that they can produce a number of decent trade setups, provided the proper care and planning go into each trade. Be sure to limit drawdown on any trade that goes against you; preservation of capital is EXTREMELY important. Don’t let a small loss turn into a big one.

Good luck out there.

Undeterred

Following the failure of the Doha OPEC meeting to freeze oil production levels, markets initially followed oil lower. However, soon after the open, US markets shook off the bad news and rallied, hitting new post-February highs, extending the strong momentum that carried the market higher all though march. The pace of gains has certainly decreased, yet the S&P 500 continues to move higher in a relatively orderly channel with a well defined rising range evident on the 30 minute chart below.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

With domestic equities breaking out the path is mostly clear for a re-test of the all time highs. However, a straight path higher is rarely the likely one, and there are plenty of newsy items on the horizon that could through up roadblocks. A bumpy road should be expected, though a higher road nonetheless.

S&P 500, daily bars

S&P 500, daily bars

Deceleration

The S&P 500 continues to decelerate after reaching the topmost resistance levels of the downward trending channel in place originating May 2015. Today, the market broke below the two converging support levels: one short term upward trending level and the other a medium term downward trending level. They are light blue and dark blue on the charts, respectively.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

This break is a likely indicator that a significant retracement of recent gains. If recent history is any indication, the most important downside target should selling pressures increase currently falls right around 1975, with a very decent buying point falling just below around 1962. The market has made moves very similar to this three or four times since last October, punctuated by the fall in January.

S&P 500, daily bars

S&P 500, daily bars

With the market weakening, this may be the time to pare back profitable long positions, and prepare for a pullback. That said, should we close the day above the levels I mentioned above, this may be a fake out before the market heads higher. Tops take time, so exercising patience will no doubt pay off. As always, keep an eye on price behavior, and good luck out there.