Refreshingly after a very volatile past month, the S&P 500 had one of the quietest days in a long time. The market spent most of the day winding itself into a tight wedge formation, with attempted breakouts in both directions, none successful. The end result was a modest close down some 3 points on the day, but well off the lows. Notable, though, were two developments: The break from the short term trend channel (the lower bound of which runs through the middle of the 3 minute chart) originating at the October 15th low, and the pause just beneath the 50 day moving average.
The former is notable because of the strength and continuity the channel exhibited during the initial V-shaped bounce off the lows, and its subsequent continuity. Those who were quick to notice these features and position for them were rewarded with one the sharpest and most profitable S&P rallies in quite some time. The striking, almost deliberate V-shape of the last month’s move is clearest on the 2 hour chart below.
At this point, though, the near term trend, as was mentioned last Friday, is due for a reset, by which I mean a pause and adjustment of the slope of the rally, not necessarily a retracement of the move. We finally got that reset today, which came in the form of an orderly move sideways out of the bounds of the channel, as opposed to a manic breakdown, which is in many ways a healthy development. It suggests that US equities still have a bid at support near below current levels, and the winding wedge is more likely a continuation pattern than a prelude to a reversal.
Which brings us to the latter development, the pause beneath the 50 day at 1966-67, which we managed to test briefly this morning. We’ve seen chop and churning at these levels between the 50 and 125 day (1946-49) moving averages many times in the last few years, with resolutions to the upside outnumbering resolutions downward.
These remain our principle points of support and resistance for the time being. Price behavior will provide important clues to how the market will move next. Its still to early to tell just how we proceed from here, but the resolution of the wedge that developed during Monday’s session will be a key telling point from which to base decisions regarding open positions. The market may be all wound up, but in coming days, is certainly will have somewhere to go.