Stock Market Breakout or Rejection at Highs
The markets rested on Thursday and Friday after their big run up to the very top of their trading channels. Friday saw a pullback to 1,395 on the S&P 500 that dipped below the key 1,400 support level, but it finished strong in the last hour of trading to actually close up at 1,405. It was another week of gains that stretched the markets even higher above their 20 and 50 SMAs. The S&P 500 is very overbought in the short term which normally leads to a snap back down to relieve that condition (i.e. statistically stretched too far).
At this stage of the market’s uptrend, it is at the top of its trading channel and very close to the strong confluence resistance of the channel top and the former 2012 high at 1,422 (intersection shown below in purple box). From a trader’s perspective, this makes for a very easy setup. If the market is able to breakout above the former high (1,422) with strong volume and it can hold that level for a few days, then the rally can extend for quite some time. It is very strong resistance and a breakout would also cause a HUGE short covering rally.
On the other hand, if the market fails to breakout above the top of the trading channel and the former high at 1,422, then the bears will take the market down very hard to test the 20 SMA at 1,375 and then the bottom of the trading channel near 1,370. The next stop would be a test of the 50 SMA in the 1,360 area.
Big Decision Time for Traders, Investors, and Institutions:
It is going to be major decision time for traders, investors, and institutions in the next few weeks. Will the investors bet on potential future Quantitative Easing steps expected from both the ECB and Fed over the large list of fundamental problems and negative divergence warnings? Will the 1,422 level have a strong breakout the top or will it create a big rejection that starts a deep pullback into late Summer? The decision is close at hand.
And, for the record, there is a large list of problems and future sell-off warning signs that investors should be aware of going forward. MR details many of these in four new blogs (see Blog 1: Stock Market Warning) that you need to read before making any more investment decisions. It is the major reason why we continue to WARN INVESTORS to stay lighter than normal on equities going into the late Summer and early Fall.
For tonight’s newsletter, we are placing a bet this week on more consolidation and a pullback that could hit 1,375 because of the strong overhead resistance in an overbought state. But as usual, MR will be watching the market action closely just in case an unlikely breakout the top occurs for some long trades.
We have no change in our portfolio protection and lighter equity recommendation until actual ECB moves have been made and are in place. MR is still cautious with higher risk equities and slightly lighter overall because of technical divergence warnings.
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