There’s been an uptick in volatility this week so let’s take a look at the near term stock market picture. The above daily chart of the S+P 500 highlights the recent price action since the 82 point correction took place in April. Here we had what looks like an inverted head and shoulders pattern for the technical analysts out there.
The resulting breakout took the S+P 500 up approximately 87 points, so we simply add 87 points to the intraday low that formed at 1862 to come up with a logical upside target, or measured move as I like to call it. That projected upside target came in at 1950 and the market pulled back after achieving that target only to match the size of the drop that ended at the 1962 low before continuing higher.
Now the next upside projection I find useful is simply adding the size of the breakout rally to the high left behind. So adding the 87 points to the high at 1902 gives a logical upside target of 1989. The market achieved that target last week and finished off this week erasing some of those gains. Now this kind of price action will always attract the doomsday callers. Honestly I have no idea what will happen going forward, but let’s take a look at some recent history to see if this is unusual or not.
This chart of the S+P 500 distinctly highlights the last multi week correction. This correction took the S+P 500 down approximately 83 points, so we project that against the new all time high at 1991 and it gives us approximately 1908 as potential support and as of Friday’s close we are almost there. Now we may very well be overdue for a much bigger correction or maybe the low was put in on Friday or will be put in this week near that 1908 level, no one knows for certain? All I do know is that you can’t have a major market decline until you at the very least break the short term supply and demand pattern of the market. Which as of now we have not.
Taking a look at the market internals we see the short term bearish divergence on the NYSE cumulative advance – decline line.
The advance – decline line on the S+P 500 shows a similar divergence, although not quite as large. Both market internal indicators are below their 50 day moving average which is by itself is not a terribly bearish scenario, but it is worth noting nonetheless.
The St. Louis Fed Financial Stress Index continues to show readings well below the 0 level. Which continues to suggest below average financial market stress.
Finally we will conclude with a look at the trend matrix, which happens to be showing a much more cautious picture that in recent history. Keep in mind this is not a market timing tool, but rather a gauge of the general market trend and the strength thereof. The market overall continues to frustrate and perplex both traders and investors. While there is no way to tell for certain what the future holds, it’s usually most prudent to continue to give the prevailing trend the benefit of the doubt at least until the short term supply and demand patterns are broken.