Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.
The sharp three-day rally off the piercing low below 1,100 on the S&P 500 came to somewhat of a rest on Friday. Of course it makes sense that traders want to take some profits after a 6% move in the S&P 500 and going into a weekend.
On the daily chart we note that after last week’s rally the index is again smack dab in the middle of the trading range of 1,100 to 1,200. From a price action point of view the question now is whether the 50-day simple moving average (blue line) will hold as resistance. Note how the last three rally attempts stopped right near the moving average.
Many of the sector and broader U.S.equity market charts still look similar to one another. One of the leading indicators I often look to are the transportation stocks as measured by the Dow Jones Transportation Average Fund (NYSE:IYT). Tuesday’s (Oct. 4) big outside day confirmed a higher low in the stochastics oscillator and is now displaying divergence between price and the oscillator. Such divergence in a leading indicator at a key support level dating back to 2010 is important to take notice of.
A break above the 50-day simple moving average near $81 on a daily closing basis might be the confirmation that market needs to head higher still. We must however keep in mind the current volatility and headline news driven market, which could easily lead to a retest or even break of Tuesday’s lows. But Tuesday’s rally off the lows was an important day to mark and I am looking for a higher low to be formed over the coming days.
Implied volatility in the equity markets remain elevated as displayed by the CBOE Volatility Index (VIX) but it too is just in the middle of its recent trading range. The chart below overlays the VIX with the SPDR S&P 500 (NYSE:SPY).
Speaking of volatility, earnings season is coming upon us this week and individual stocks will again display outsized moves giving clued-in options traders with a plan great opportunity for cash flow trades. Given the near-term overly pessimistic sentiment and the aforementioned divergence on the charts of key leading indicators, I cannot help but wonder whether weak earnings announcements will be bought. While I remain bearish and believe last week’s lows will eventually be broken to the downside, it may be possible this will not come to pass until early 2012.
As we remain in a quick swing trader’s market, a close below 1,100 on the S&P 500 on good volume and deteriorating market internals would be bearish and allow us to add short positions with more conviction.
