Markets Stall at Familiar Levels
After a very volatile end to the month of August, we were able to recover all of the losses just as quickly in the US markets. Everything is starting to feel great again, and we are starting to regain our confidence in our portfolios and the markets as a whole.
However, technical analysts are starting to see clear signs of an empty gas tank, and a much needed move back to support levels to shake out some of the late comers. Swings lower are a normal course of the investment cycle, and investors need not worry. Traders should be outright excited as this means we can make some retracement money through purchasing puts when the time is right.
Here are three big signs the market is most likely headed lower in the coming week:
1) Failing near familiar resistance levels.
Look at the chart below, we can see price fail and immediately turn twice in March, twice in April, once in May, once in June and once in July.
These price failures were all between a tight 15 point range between 2,115 to 2,130 on the S&P500 index. Fast forward to the beginning of November, and we can see yet another failure at the exact same level of 2,117.50.
This is called a resistance level, and it can have a strong selling effect as traders start selling to lock profits from the recent rally, and even reverse positions to the short side. We are starting to position ourselves for shorts in the coming weeks – keep you posted.
The downside target of a move lower will be around 2,040, based on support level analysis. If you want to learn more about how to identify these levels for yourself, with laser accurate precision – signup for 8 free lessons of our Trading Foundations Course.
2) Strengthening US dollar.
An increasing currency in the US might sound like a great sign of economic strength, but a strong currency puts negative pressures on export businesses, as their products become more expensive for foreigners to purchase. So why is the US dollar increasing?
The rally of late is happening due to expectations that the Federal Reserve will begin hiking interest rates later this year at their December 16th, 2015 meeting.
This move would be positive for savers as they will earn more money on their savings. These investors will flow back into the US dollar in expectation of a rate hike, which further drives the dollar prices higher, while putting downward pressure on companies.
3) Percentage of stocks above 50 day moving average nearing 1 year high.
The chart below shows the percentage of stocks that are currently trading above their 50 day moving average. This sounds like a great thing initially, until you consider that no trend lasts forever. The more companies that trade above their 50 day average prices, the more overbought the market conditions. You can see that prices above 68% in the past year have led to a pretty rapid drop thereafter.
These peaks are a very accurate prediction of market sell-offs. Anything below a 30% reading gives the opposite sign, that we may be entering oversold conditions. This chart is a very powerful momentum measuring tool.
We are expecting a move lower this week, and will short the market through purchasing puts on the SPX index, and/or the SPY ETF. We will be looking for volume confirmation to give us the final entry timing.
There is a lot of weight on the shoulders of markets to end the year, and time has shown that these are very precise turning points.
Good luck and good trading, this week is pivotal.
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