Category Archives: Strategy

Posts regarding investing strategies and developments in the broader world of investing.

Considering Divergences

Over the course of July, the S&P 500 continued making incremental progress higher, with multiple new all time highs, despite a weak June, and a weak start to the month. However, while the stock market has been hot, the US dollar has been decidedly not so hot. The greenback has fallen about 8% over the course of 2017, and has logged five consecutive monthly closes as of today.

The weak dollar in the near term has provided a tailwind to corporate earnings and stocks by extension to a certain degree. The macro picture may not be as rosy looking further out, though. The weak dollar gives broader latitude to the Fed to raise rates and trim its balance sheet, and with a heavily oversold dollar, a bounce may be due in short order, which on its own could have significant market implications.

S&P 500, 30 minute chart

For the time being, though, the market trend appears higher, albeit at a ¬†downshifted pace. A new overhead level of resistance is emerging, signaling a downward inflection of the rising range in which the market has traded for most of 2017. The light blue channel at the top of the 30 minute chart represents a “sell level” indicator if the broader light blue channel is to hold for the duration of the summer. Should we break out of this level, we could see the market rally substantially higher in a hurry, but this is a less likely scenario in my estimation.

S&P 500, daily bars

Should the S&P 500-US dollar divergence begin to close, the market has plenty of room to move to the downside without suffering a critical rising trend breakdown. The market has substantial support levels at 2426 and 2390, both of which if revisited would present great long side entry opportunities for a resumption of the longer term bull market. Below those levels, there is a lot of air until the 2290 and 2150 levels are reached, should a significant correction be in our near future, though a revisit of these levels are pretty unlikely for some time.

While caution is warranted with the market trading at more than fully valued levels, the most likely scenario for the rest of the summer is a slow gradual rally with small speed bumps. As always, keep your eyes peeled and good luck out there.

Arching Over

As spring wears on, the market tends to slow, and this process is evident in 2017. While the major indices have all been making new all-time highs recently, the pace of appreciation has diminished from that of the November-March period.

The S&P 500 has settled into a tighter upward sloping range of late (black channel), while also interacting with the lower end of the aforementioned November-March trend (green channel). The index looks set to follow this recent path for the foreseeable future, with support in the 1370 region, clearly visible on the 30 minute and hourly charts.

While we can safely expect some periods of turbulence and consolidation during the summer doldrums, the market’s longer term up-trend shows all signs of remaining intact, despite numerous potential geopolitical and economic risks. However, if looking for entry points for new capital, there is ample reason to wait and take advantage of entry points on the lower end of the recent rising range when they present themselves.

S&P 500, hourly bars

S&P 500, 30 minute bars

S&P 500, daily bars

Acquiescence

The opposite of quiescence. What we have here now in US equities is the sudden, explosive return of volatility, volatility that was wholly absent over most of the summer post-Brexit. With it has come a return of high inter-asset class correlation and low dispersion; a return to risk-on, risk-off behavior.

The latest bout has been Fed induced and Fed stoked, with FOMC voters and non-voters alike sending somewhat mixed signals about the course of monetary policy for the remainder of 2016. Rate hike expectations abound with little certainty as to timing. September’s will, though, be a live meeting, and the markets will be on a razor’s edge. Expect big moves next Wednesday.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

Technically, the market has brought itself down to some nice support, off of which it has bounced dramatically. The drought is over; we have seen back to back 1% + up or down days after one of the longest spells of very small daily moves in decades. The market, while at a significant support level (one that presented resistance back in June), probably still has farther to fall. The rising trend channel line (orange) at 2108 may be place to pause and bounce, like the market did in May earlier this year (see daily chart below).

S&P 500, daily bars

S&P 500, daily bars

Below 2108, the next serious support comes in around the 2050s, where the market abruptly turned after the Brexit referendum. Its possible a level in this range could present a good buying opportunity if reached as we close out the summer selling season and move into late fall. Once we’re well into the 4th quarter, we enter the beginning of the strongest seasonal period of the year, when its very likely we could get a strong rally. The election may present some road bumps, but we will be following the technical developments and keep you updated.

Good luck out there.

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.

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.

Taking the Long View

This post is going to be a chartfest, pure and simple. I’ve got a selection of S&P 500 charts (my specialty) here ranging from 30 minutes to yearly OHLC bars, but all with the same levels I’m following retained to help give an idea of the scale of the current operative range on the S&P 500, from a close look at the recent trading levels zooming out to a the multi decade trend we’re still moving within.

I will add more commentary in subsequent posts, but for now, I will let the charts do the talking.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

S&P 500, hourly bars

S&P 500, hourly bars

S&P 500, daily bars

S&P 500, daily bars

S&P 500, weekly bars

S&P 500, weekly bars

S&P 500, 8 day bars

S&P 500, 8 day bars

S&P 500, yearly

S&P 500, yearly

Well Defined

Today we’re looking at the charts from a different angle. Below are plots of the S&P from longest to shortest perspective, as opposed to the other way round as I usually present them. They all show a market that has followed sets of well-defined trends for some time. The challenge is just a matter of identifying them, whether they are short, medium or long term, and tracking how they break and shift over time. These points often make for great high percentage trade setups.

Taking a multi-frame perspective, from near term to long term or vice versa, is something I find very helpful in my trading day to day in identifying these setups. It helps me analyze the condition of the index, finding important lines of support and resistance, and put seemingly random day to day moves into a more systematic context. Put simply, it allows the story behind the data to come through more clearly.

S&P 500, daily bars, 2014.11.19

S&P 500, daily bars, 2014.11.19

The daily chart illustrates best just how strong the bull market has been in the past two years.

S&P 500, hourly bars, 2014.11.19

S&P 500, hourly bars, 2014.11.19

On the hourly, note the three phases of the move from the October 15th low that I’ve written about a number of times in recent posts.

S&P 500, 10 minute bars, 2014.11.19

S&P 500, 10 minute bars, 2014.11.19

The most recent phase is still well intact and developing nicely.

S&P 500, 3 minute bars, 2014.11.19

S&P 500, 3 minute bars, 2014.11.19

Right now, despite remaining fundamentally bullish, I’m a little uneasy with how calm this market has been lately, and the frequency with which the market has been testing rising lower trend channel support. Seasonality also favors caution in the coming week; the days leading up to Thanksgiving have a tended to see pullbacks in the past. Black Friday is often a better day to buy stocks than it is to buy discounted merchandise.

History is never gospel, and the trend doesn’t lie, but the listlessness in the market in recent weeks makes now as good a time as any to pare back any long exposure that may be keeping you up at night.

I’ll be back with an update tomorrow.