From a trading perspective, this has been a frustrating market. For most of 2015 the markets have been stuck in a sideways trading pattern. Every time the market looks like it is going to break out (either up or down) of its trading range, we get a lackluster follow through and move back into a widening trading range.
Investors don’t seem too committed at this point. Uncertainty about what the Fed’s next move will be, combined with the mixture of good and bad economic data, has many scratching their heads.
All we can do at this point as active, technical traders is follow the charts and not second guess or try to anticipate future reversals.
With that said, let’s take a look at the current market trends and how we are, once again, at another “line in the sand” moment.
S&P 500 Index
The S&P 500 Index has quickly broken through various support levels. The one that sticks out the most to me is the failure of the support level established when the market broke above the trading range that has been in place since December 2014.
We now need to pay attention to the upward rising trendline that has been in place since October 2014.
I should also note that the bond markets are facing a similar “line in the sand” moment (which I will discuss further below).
Going back to the S&P 500 Index, a look at the weekly charts show the longer term, upward channel is still in place. A move below this trendline will be a big deal to market watchers.
Technology names, which make up most of the Nasdaq 100’s weighting, typically lead the market. As investors are feeling aggressive, they are the first to rise. Likewise, as investors become more risk adverse, tech names are the first to decline.
Notice how the “QQQ” ETF has been holding onto its breakout support level:
Small caps are also facing a “line in the sand” moment.
Small cap stocks have broken below its breakout support levels. Up next is the rising trend line that has been in place since October 2014.
I find it interesting that so many indices are testing their long term trend lines.
US Treasury Bonds
As a chart watcher, this is where it starts to get interesting…
US Treasury bonds are testing their downward trend line.
Typically, US Treasury bonds are considered a safe haven asset group. As equity markets break down, risk adverse investors move out of equities and into bonds.
As the S&P 500 Index tests its upward trendline, US Treasury bonds will be facing a similar test. A break down in the S&P’s trendline, combined with a break ABOVE the downward trendline in US Treasury bonds, is a clear signal that investors’ perception of the market has changed.
Market volatility, as measured by the VIX, has been rising. However it is not at a high level yet.
A measurement above 20 in the VIX is considered by many as a warning sign. (Note the October 2014 levels when the S&P 500’s long term trend begins.)
What this means to me, is that IF the trend in equities and bonds reverse, it will be a surprise to most of the market. Highly leveraged investors may quickly shift out of equities which could result in a deep selloff.
Will the reversal in equities and bonds occur? I don’t know. In fact it may have occurred by the time you read this.
What I do know is that the amount of leverage being used in the market today is at a record high. Markets can move very quickly in this environment.
While I am not a proponent of anticipating future trends (unfortunately I haven’t found a magic crystal ball that predicts the future yet), watching for breaks in the trends is important.
More and more automated trading systems and algorithms use these trendlines to create buy and sell programs. The automated buy/sell programs can be swift and aggressive. As a result, those who ignore the trends are typically left reacting to the aftermath.
That all for now. Thanks for reading,
Front page/featured Image source: Wikimedia Commons/Jonund