In The Death Zone

Happy jobs day. On Mt Everest, there is a area of the mountain near the top that reaches above the 8000 meter level. At elevations this high, the air is so thin, it becomes difficult to breathe, difficult to move, and very dangerous.  For mountaineers, everything slows down dramatically; progress towards the summit is arduous and painstaking, leading many to turn back before reaching the top. Many only reach the top with the aid of supplemental oxygen. Time in this zone is of the essence; summiting the mountain must be done as early as possible as getting caught overnight above 8000m is virtually a death sentence.

For this reason, this part of the mountain has been called the “Death Zone,” not because everyone who enters it dies, but because the vast majority of deaths that occur on Mt Everest occur there. Entering these rarefied levels requires heavy preparation and extreme caution.

What does all this have to do with the S&P? Because in recent weeks, if the post crisis upward trading range on the S&P 500 were Mt Everest, then we are currently in the death zone.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

Looking at the 3 minute chart, it is clear that we have slowed down noticeably. We may be undergoing a shift to another lesser sloping trend channel (from the green channel to the white), which would be the fourth such downshift since the October 15 low. Until such a shift is confirmed, though, we should treat the 2060-2080 range as our operative support and resistance range, and be on the lookout for breaks though either, adjusting positions accordingly.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

This new channel runs nearly parallel to the longer term trend (orange on the 10 minute chart), just beneath it, rising at a rate of roughly half an S&P point per day. We may see trend development along this path, but it may also be transitory. Only time will tell; we will continue to monitor the market at this junction to get an idea of which path we’re headed down.

S&P 500, hourly bars

S&P 500, hourly bars

What is clear from the hourly chart is that the market slowed down dramatically once we passed into the “Death Zone” range (between the orange lines) on November 6th. We’ve moved in fits and starts; there were a few noticeable pops, but typically followed by selling pressure that kept any acceleration in check.

S&P 500, daily bars

S&P 500, daily bars

Stepping back to the daily chart, we can see at least 4 instances in the past couple years of the market crossing into this range, trading parallel with it briefly, though for nearly two months in June-July of this year, but then pulling back sharply. Moves into this region tend to be brief, and followed by sharp pullbacks.

S&P 500, 3 day bars

S&P 500, 3 day bars

Looking at the 3 day chart, we see that this range proved to be insurmountable resistance as far back as 2010 and 2011 as well. There is certainly a real possibility that this time could be different, and that we could be on the cusp of a major sustained breakout from the post crisis “wedge” between the red and orange lines on the chart. The range is getting tighter and tighter all the time. The lower end held quite well as support quite well in October, which may suggest a resolution of this long term range to the upside.

I would urge caution, however. There is no reason to give give this hypothesis the benefit of any doubt. I think the risk of a pullback from these levels, while not imminent, is real and traders should approach long positions with great care. It will be difficult for the market to make any large moves to the upside from here. Even good economic news may produce tepid rallies, and possibly result in selling pressure. A case in point is the Jobs Report this morning, which reported a blowout 321K jobs added for November, far exceeding the 230K expected, yet the futures point to a nearly flat open.

While we may not selloff significantly for some time, we can expect, like climbers in the Mt Everest Death Zone, slow going from here, barring a major breakout. Move up your stops if you have profits, and keep an eye out for breaks either out or down. Good luck out there.

Disclosure: I remain long the S&P through UPRO, though with a half position.

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