Morning Thoughts Monday October 24

Options expiration Friday ended up being everything it is hyped up to be: volatile, fairly unpredictable, and for most not worth trading.  After it was all set and done however stocks rallied into the close and finished at their highs for the day and week.  Given the wide resistance zone we currently find ourselves in on the major equity indices somewhat higher prices are still possible, but we must be aware that the air is getting increasingly thin up here.  The coming week has the potential to serve up some seriously high volatility trading sessions due to more EU summits and an onslaught of U.S. blue chip and technology earnings.         

For a little perspective I like to frequently review the weekly charts of the major indicators that I use.  The main ‘recent’ development on the weekly chart of the S&P 500 remains the break below the two-year up-trend in early August.  So far it looks like the early May high this year may have been an important lower high as compared to the October 2007 high.  What the index is doing now is re-resting the breakdown level from early August and as such is coming into major resistance here at any moment now.       

We see this much more clearly on the daily chart.  Note the gray zone that roughly spans from 1230 up to 1300 and the numerous resistance signals that come into play there:  1) horizontal resistance of the August – October trading range near 1230, 2) the 61.8% Fibonacci Retracement of the May highs down to the August lows comes in near 1250, 3) the flat 200 day simple moving average may also serve as resistance near 1275.  Given the vicious and volatile nature of bear market rallies we must leave further upside potential, which is why I currently see a maximum rally potential peak out near 1300.  Should we be able to sustain a rally above 1300 we would need to reevaluate the situation.     

Plenty of charts across the asset classes look similar to that of the S&P 500.  One such macro chart is that of oil.  Much like stocks, oil also broke below a two-year uptrend support in early August and is now soon coming into important resistance around $92 (red horizontal line).  Some other macro charts worth watching for similar patterns are that of the EUR/USD fx cross, copper, and that of semiconductors stocks.    

As is most often the case, the current trading and investing environment is all about timeframe.  While I feel fairly certain about more significant downside to come at some point over the next 3-6 months the near-term is much more uncertain and looks to offer more of a choppy and wide sideways trading range.  My most important focus at the moment remains to keep timeframes short and spot opportunities with clear stop and profit areas on the respective charts. 

 

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