Today should be interesting…
Last Thursday, I wrote:
Until the S&P 500 can break above the 2475 level achieved earlier in August, the bears get the benefit of the doubt.
Bearish traders can short the S&P 500 right here at about 2460-ish, and keep a stop at 2475-ish. That will limit any potential loss if the market moves higher from here.
On Friday, the S&P 500 closed at 2476. So, if we’re adhering to strict rules, bearish traders should be covering their short positions because the bulls are back in charge.
But this is a good example of how technical analysis is more of an art than an exact science. It’s also why I added “-ish” to the 2475 level. It allows for some wiggle room depending upon other conditions.
You see, while the S&P did close above the 2475 resistance level, it wasn’t a “decisive” break. There wasn’t much energy behind the move. There wasn’t much volume. And the index actually fell a few points in the final hour of trading on Friday.
We also have several technical indicators – like the McClellan Oscillators for the NYSE and the NASDAQ – trading in overbought territory (which often precedes at least a quick pullback). Volatility Index (VIX) option prices are predicting a higher VIX – which usually comes with a falling stock market. And the intraday charts of the S&P 500 are overbought and are showing negative divergence.
For example, here’s the 15-minute chart of the S&P 500…
The index ramped higher on Thursday and Friday. But key momentum indicators like the MACD and the RSI moved lower. This sort of “negative divergence” tells us the momentum behind the rally was weak. And it often leads to a reversal lower – similar to what happened in mid-August.
Keep in mind, this is a 15-minute chart. It’s useful for extremely short-term moves of just a day or two. So, if the negative divergence is going to play out, it should happen by tomorrow.
That’s why I told my Delta Report subscribers on Friday that I’d be keeping my short position unless the S&P 500 closed “decisively” above 2475. It didn’t. So, I still have some short exposure going into this morning.
Today we can watch how the market responds to the North Korea nuclear bomb news. S&P 500 futures are down just 10 points as I write this on Sunday night. That seems to me like a rather tame response, which is a testament to the underlying strength of the stock market.
So, I’m interested to see how this 15-minute chart plays out. If we get only a modest decline today, and the MACD drops back to zero and the RSI falls below 30, that means the bears will have used up a lot of energy for just a small move lower.
In that case, it will probably make sense to close the short trade for just a very small loss.
On the other hand, if we get a strong decline in the S&P 500 (like a move back below 2462) then the bears can take back the momentum and the market might be set up for another decline – similar to what we saw in mid-August. In that case, it will make sense to hold the short position for a larger downside move.
Like I said… today should be interesting.
Best regards and good trading,
Jeff Clark
P.S. Are you holding onto any short exposure as we head into this week? Send me your responses, questions, and suggestions right here.