Home, home on the (trading) range

 

The trading range looks likely to continue for the S&P500 and related indices for a while yet. Recent market malaise has brought the market down to the bottom of its range, after noting on June 25th that my neartermed trading signals were peaking here .

A couple of indicators are suggesting a setup for the S&P to rally back up to the top- or near the top-  of its range shortly. This does not suggest that I am in any way “bullish” for the summer—I merely see a potential setup for a neartermed rally at this time. Here is what I am looking at, and will watch for :

Sentiment

Smart dumb $

First, I note that www.sentimentrader.com indicates “smart money”  confidence is growing higher now that the market has pulled back. These guys are the accurate traders, such as commercial hedgers, large institutions (pensions, etc) and sophisticated traders. Meanwhile, the least accurate “dumb money” (retail fund buyers, small speculators, etc) are becoming pessimistic. As you can see on sentimentraders chart, 65% of the smart guys are confident now (vs. in the 40’s a couple of months ago!) – while the dummies have dropped from a 70% + confidence level – to 45% now. That should set us up for a rally if history is a guide.

 

Confirmation

S&P nearterm

Now we need to see a few things happen to confirm a high-confidence trade. First, I’d like to see the S&P hold above the 200 day MA for 3 days (thick red line on chart). Next, I want to continue to see 2050 act as support on the chart. If that doesn’t hold, we may be in for another 50 points downside (see my blue and dashed green horizontal lines on the chart). I’d like to see a rally off of the lower Bollinger Band. Finally, I’d like to see a hook on RSI—it looks like Stochastics is attempting a hook. Review the aforementioned blog to see the entire trading system and its past signals over the recent trading range.

Of note—Bollinger Bands have expanded lately. This often donates a change in trend. So don’t be hasty in committing all of your capital on this rally potential—leg in, and only upon the conditions described…

 

BTW—I’ll be on BNN next Tuesday at 6PM. I promise an interesting opening market commentary—hope you can watch the show!

 

2 Comments

  • To me it looks like an oversold dead cat bounce. The China and Greece problems are still there. In Fact the chart FXI looks like its bouncing into powerful overhead resistance. But I am not expert., I am likely in the dumb money category unfortunately .

    Reply
    • We’re all “dumb money” Dave! Unless you happen to be a large institutional hedger or an insider, that is!

      And yes, I am in your camp–its a trading market, looks like a bounce but not a bull. How high will it go? Not sure–but could be 2100-ish or a bit more. Or not!
      We’ll see. Like I said, fasten your seatbelt!

      Reply

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