Throttling Back

The S&P has officially moved out from the breakneck paced upward trend channel it had traded in since October. The move was barely noticeable; we’re been continuing higher, almost without interruption, just at a slower pace. The structure of the emerging trend is now taking shape; shortly, we will have a better sense of where, and how sharply, the trend has inflected lower.

Clues are emerging on the 3 minute chart. The two questions left to be answered at this point are 1.) Do we see the emerging structures develop meaningfully and trade-ably over the coming weeks? 2.) Do we see an increase in volatility accompany the transitional phase?

S&P 500. 3 minute

S&P 500, 3 minute

Looking at the 10 minute chart, its clear that sudden, sharp sell-offs often accompany breaks of this nature. We saw just such an event on Nov 3, retesting support and bouncing higher. Initial support on a break falls between 2025-2030.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

Looking at the daily chart, the lower inflection of the recent move becomes more evident. There was never any question regarding the sustainability of the pace of the move from October 15; it was bound to cool down at some point. It had to cool down. Were we to continue at the pace of the past three weeks for the remainder of the year, the S&P would close above 2500. Such is obviously unsustainable, so a cooling down of the trend is actually quite healthy.

S&P 500, daily bars

S&P 500, daily bars

We need to be ready for the possibility that the year end “melt-up” (I don’t like that term at all) has already begun, and that seasonal tailwinds will carry us gradually but inexorably to the upper end of the long term trend-channel, currently around 2072. Thats a long way, and I sincerely doubt we’re going to get there in a straight line. But the type of low volatility, gradual upward drift that characterized much of 2013 is now a distinct possibility, and we need to be ready to trade what the market gives us, not what we want the market to give us.

Good luck out there.

Leave a Reply

Your email address will not be published. Required fields are marked *