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.
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.
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.
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
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
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.
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
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.
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
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
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.
Markets ended the day substantially lower yesterday, resting on near term uptrend support, and just below a pocket of significant resistance. Today, we’ve managed to bounce off of support back into the pocket (between top two blue lines on 30 minute chart). The charts from yesterday and today are shown for comparison.
S&P 500 yesterday at the close, 30 minute bars
S&P 500 today, 30 minute bars
What this indicates is that the near term move is still adequately supported such that the possibility of an upside breakout is still very much on the table. That said, the market is testing the support to an extent we haven’t seen since the February lows. Furthermore, the rate of gains is decelerating, as can be seen from the near term trendlines on daily chart below. This is completely in keeping with the beginning of a topping pattern, though this is not to say we’ve seen the highs for the move. It could also represent the “pause that refreshes”, setting the stage for renewed upside.
S&P 500 at yesterday’s close, daily bars
This is all to say that the market is sitting on a live wire, in a pocket with potential to go either way. For the bears, a break below both the blue and teal trendlines would present a great short trade opportunity. For the bulls, a decisive break above resistance at ~2070 would present a great long trade setup, with a clear threshold for a stop order should we see a false breakout.