Low Volume Of the Holiday Week, As Usual, Is Not Likely To Provide The Needed Breakout

Despite some downward, selling pressures, the major indices main support and resistance have once again held. Currently, the overall bullish trend of the market persists; however, there is a range pattern forming and the upward momentum has diminished significantly in the last month Some of the technical indicators have weakened, but as long as support holds, they are not very important.

On the up side, the S&P 500 resistance in the 1155 - 1160 area remains in tact, resulting in a tight trading range. For four straight days [recently], the S&P 500 ($SPX) opened above 1110 and traded higher, but each day selling pushed the closing back below 1110, it has just recently managed to close above 1110 but the low volume suggests a false breakout. First support for the S&P 500 is now at 1110. Resistance for the DOW Jones Industrial Average remains at 10,550 and there is first support at 10,437 and then the next major support level at 10,280/290. It would take a daily close outside of these levels to have meaningful significance. Also, both of these indices are forming a bearish (inclining wedge) pattern.

Market tops are usually marked by weakening breadth. Numerous breadth oscillators have shown much weakness over the last month. That weakening breadth, combined with a bearish pattern and not being able to break above resistance are certainly all negative signs.

Equity-only put-call ratios have been unreliable ever since heavy hedging activity began last summer. That activity seems to be abating now, so we are tentatively looking to use the equity-only ratios as reliable market indicators again. These ratios have also recently generated bearish signals.

Volatility indices ($VIX and $VXO) continue to decline, and that is generally bullish for stocks. $VIX would have to close above 25 to potentially change its chart to bearish. However, these volatility measures are at historically low, or below average levels, suggesting it may be time for them to spike up with an increase in volatility, which would then lead to an increase in risk aversion and a market decline.

Meanwhile, the $VIX futures continue to trade with large premiums. The January premium is 3.70 and February is a relatively large 5.50. These large premiums indicate an overbought market, but Sell signals wouldn’t be generated until the premium peaks and falls below 1.00 or so. Also, other indicators of market strength such as RSI, Stochastics, MACD, etc.. all indicate the market is overbought, and they are starting to turn negative which would produce sell signals as well.

The term structure of the $VIX futures continues to slope steeply upwards, which is another indication of a bullish but overbought condition. This has persisted to some extent since March. A term structure intermediate-term Sell signal would occur only if the structure began to slope downwards.

In summary, both bulls and bears are in a stuck, confused position at the moment. It will remain this way until a breakout of the above mentioned support or resistances occurs. Once the breakout occurs it will be a very large, capitulation move for the markets. Due to our analysis, this breakout we believe is most likely to be to the downside for the markets. We suggest you either allocate your investments for a rise in volatility, or since we are generally bearish at the moment, begin decreasing your exposure to equities. If you have a shorter time frame in mind you could buy or sell the major markets on a breakout of the two above levels, or trade the range between the two levels, this however can be complex so we suggest you do your due diligence before trading short-term. Just call us at 262-939-8885 and we can help you with any questions you may have about how to be prepared. Have a very Merry Christmas, and we will post more "Seedlings For Your Healthiest Money Tree" at the beginning of next week.