Markets at an important juncture

We’re at what could be a tipping point for the stock market. Volatility has been high of late—swinging from massive upside/downside swings last summer & fall, then more upside/downside craziness during the first 2 months of this year. Individual daily movements have been large. Sentimentrader notes that the number of 1% daily moves is the highest in 3 years. In fact, 28/50 of the past 50 trading days have had swings of 1% or more. That’s volatile – and not necessarily good for investors if that pattern continues.

As I noted in a blog last week the stock market must be assumed to be in an intermediate term bear market until old highs are taken out, along with the 200 day MA. Given that the old highs are quite a ways away—2135 to be specific—we can look at current conditions to see if there is a shorter termed bullish trend in place worthy of trading. I feel that we are at a tipping point in determining if we are about to move from current levels back into the ceiling (2130-ish) that contained and tested the stock market during 2015.  Here’s what to look for:

• S&P 500 recently broke through its double bottom neckline of 1940. Significant resistance lies at 1990. Will it crack that level?
• Near termed support now lies at that neckline level of 1940. It must be held- we are now 3 days into that breakout, a good sign. But be mindful of this level.
• Slow and intermediate termed oscillators RSI and MACD look very good on the daily chart, suggesting positive movement potential in the coming weeks
• Stochastics, a very short termed timing oscillator, is overbought and signals a pullback in the coming days. We don’t want a break through 1940, should we get a pullback.
• There has been some (recent) correlation of WTI Crude Oil to the S&P500. Oil needs to break $35 to be truly bullish. Such a break would be exciting for crude oil’s prospects, for the TSX (given its high weighting in energy stocks) and the S&P500 . I covered that potential on Monday.
• Seasonal tendencies of the markets and for crude oil are positive from this point until the spring; so far, so good.
• On the negative side: Sentimentrader reports: “The S&P has gained 2% or more, moving to a one-month high but still below its 200-day average, 46 times since 1962. If the S&P fell back over the next 3 days, then over the ensuing 30 days it showed a positive return only 39% of the time, averaging -1.1%. But if buyers persisted and it showed a positive return over the next 3 days, then over the ensuing 30 days it had a positive return 71% of the time, averaging +2.3%. As always, when a market doesn’t do what it should, it speaks loudly.”

My conclusion after considering the above factors is that there is a pretty good potential for the market to break through the 1990 resistance noted above. The major caveat to that will be oil, which needs to break $35/barrel. Stochastics tells us that a near termed correction is likely for both the market and oil.  I’m inclined to deploy a little cash into the market upon a stochastics retreat and bottom hook. Either way, I am looking to deploy the majority of our 40% cash position should WTI break $35 and hold for a few days, and/or if the S&P500 breaks through 1990.

If the market doesn’t hold the recent breakout point (neckline of the double bottom) at around 1940, I would be inclined to keep my cash and possibly hedge out risk with negatively correlated ETF’s, as discussed in past blogs. We’re at a tipping point right now, albeit with odds in the markets favor at this time. From my perspective, by waiting a few days to see if things play out as described above, you maximize your chances of making the correct decisions.