Market Report 5/23/16

Last week the market traded in a fairly wide choppy range. As I’ve been pointing out for the last few weeks, the SPX has support below and resistance overhead.

The first “line of resistance” is the downward-sloping trendline we’ve been watching and the market will first need to get through that to make any forward progress. That could happen this week.

But the BIG point of resistance is the April 20th high at 2111, which is the most recent high which forms the “double-top” we’ve also been talking about for weeks.

Here’s a look at the weekly SPX chart so you can see how the price is still “trapped” between support and resistance.

SPX_W_5212016

It’s interesting to note that last week’s low touched the top of that support zone which runs from 1996 to 2025. As you recall I drew that support zone back at the beginning of the month and I think it’s still perfectly valid.

Originally I rounded off and put the lower value at an even 2000, but actually 1996 is the exact 38.2% Fibonacci retracement level from the February low to the recent 2111 high. I figured it would be easier to remember.

Someone mentioned that it seemed like that support zone seemed wide but in reality it’s just over 1 ATR. It’s always important to know the ATR of the market (or a stock) because it lets you kinow what to expect as far as as “average daily range”.

Right now the ATR on the SPX stands at 21. This means on any given day we can expect the S&P 500 to move 21 points. So when you see an up or down 10 move it’s not nearly as dramatic as some would lead you to believe.

The financial media tends to get all whipped-up into a frenzy on days where the market moves 1 ATR which is honestly standard-fare.

While the S&P and Dow are just a few percent below the all-time highs, the NASDAQ and Russell 2000 are well below their highs and the charts of the latter don’t look nearly as constructive as the former.

Here’s a look at how everything is performing so far year to date.

YTD_5212016

So even with the Dow and SPX barely below the all-time highs, they haven’t really made much progress so far this year at this point in time.

With earnings season basically behind us, the talk has turned back to the Fed and the timeline for the next rate hike. Last week the Fed spooked the market a bit by saying that a June hike is still on the table and the market hadn’t really been pricing that in. They’ve also hinted that perhaps July will be the month, but basically the market had a bit of “repricing” based on the language in the Fed minutes.

So that’s one thing everyone will be focused on this weeks and get this – there will be like 9 Fed speakers this week. That should add quite a bit of confusion and volatility to things. All this Fed jawboning and mixed signals and confusion on exactly when they will raise rates has reached the point where it’s almost ridiculous. But there’s no question it moves the market so as silly as it seems, it’s a factor.

Here’s something really interesting that I’ve mentioned a few times recently and I thought I would post it here as a good take-away for this week. This is courtesy of JR, a long-time member that pointed this out to me several years ago. I’ve always remembered it and over the years I’ve found it to be true in a broader sense of the overall environment.

It’s very simple. When the McClellan Oscillator is below the zero line the trading environment is “tough”. When it’s above the zero line it’s a much better overall environment – and swing trades tend to work better and get follow-through. Simple as that.

T2016_5212016

Now of course if the McClellan works it’s way into the overbought or oversold zone, it indicates the market is stretched in one direction and a “reversion” is likely. But most of the time the McClellan isn’t overbought or oversold so this is a good all-around thing to keep in mind as far as gauging the current market environment.

So the thing to keep an eye out for is the McClellan moving back over the zero line which would indicate conditions have turned more favorable. What a great way of looking at that indicator – thanks JR!

Headed into this week it’s tough to get a good read on what to expect. As I pointed out the market is trapped between support and resistance and all the forthcoming Fed talk will likely make for some choppy trading.

I’m starting to think the “pain trade” is the market chopping around in a wide range, directionless and without trend.

Last week was the 1-year anniversary of the SPX all-time high and obviously we haven’t breached that high in over a year. So what is the trend of the market? Sideways essentially. For now we are in a “buy the dips and sell the rips” sort of market, both on short and even longer timeframes.

Under the surface we still see the thing I’ve been talking about here for a while now – the day to day sector rotation. Last week when the Fed hinted June-July was back on the table the financial stocks got a decent pop up, gave most of it back the next day but ended the week strong. Maybe that will be a sector that comes back into favor.

The Fed speak caused the materials stocks (along with gold / silver miners) to sell-off Wednesday then gap down big Thursday, but they recovered a bit by the end of the week. Energy stocks were a mixed bag but the price of oil is running up to some serious resistance around $50 WTI which I’d say is the upper-end of the range. It wouldn’t surprise me to see oil pull back a bit from the “around 50” level.

Biotechs seem to be acting a lot better and even though they have big ups and downs from day to day, the bigger picture is that they seem to be coming back into favor a bit.

I’ve posted a few new charts in the Chart Feed so be sure to take a look at those. Honestly there are quite a few constructive charts out there right now and I think that this week might actually make for some decent trading.

We have two open swing trades right now and I’m not opposed to adding a couple more this week if the market is acting well. The market has had a shallow pullback over these past few weeks and might actually be due for a bit of an up move here. We’ll have to see.

Don’t confuse that with the idea that 2111 is still a long way up and the market is not going anywhere until it takes out that “double-top” level, but in the mean time I’m thinking that focusing on the stocks with the right patterns here is the thing to do.

Join me on the live shows this week and we’ll take a look at the charts that show promise and see what the overall market has in store.