Why This Market is Resilient

On July 3, readers were alerted to a short-term target of 4512 in the S&P 500 (SPX). Just ten days later, the market reached this level.

And now that the Fed’s most recent decision on interest rates is behind us, it’s time to assess the market with fresh eyes.

Last Wednesday, the central bank raised rates by another 25 basis points.

Usually, such an event would result in considerable volatility in the markets. But not this time…

In fact, the initial reaction to the interest rate hike was quite muted.

By the end of the trading session on Wednesday, SPX had gone nowhere for the entire day.

There are two key features to this price chart.

First, we have bearish divergence in the Relative Strength Index (RSI). This is a common occurrence near market tops.

Notice how the RSI actually peaked in the middle of June. Since then, prices have gone higher, but the indicator has trended lower.

This is a sign that bullish momentum is getting exhausted.

The second important feature is how prices are testing the upper boundary line of the parallel channel. Channels are a great way to forecast potential turning points in the market.

Hitting the resistance line of the channel in combination with the bearish momentum seen in the RSI should have traders on high alert.

But there’s no doubt that this market is proving to be very resilient. Since putting in a bottom on March 14, SPX has rallied over 20%.

It’s very possible the market will ignore these bearish signals and just keep trading higher.

The truth is that trading and market forecasting are separate disciplines, even though they are closely related.

The major difference between forecasting a market and trading it is the risk involved. Simply making a market call doesn’t usually cost anything, except for wounded pride. Trading on the other hand, can definitely cost you money.

That’s why all successful traders know that the key to consistent profitability is all about risk management. And right now, the risk is getting heavily skewed to the downside.

In other words, the market likely has a lot less room to go higher than it does to go lower.

In terms of how to use this analysis, you have options. Which choice is right for you ultimately depends on a combination of your personal risk tolerance and the kind of trader you are.

Short-term traders, for example, could look to play the downside by buying puts. Long-term investors, however, could look to take profits or move up stops to protect any profitable positions.

As the market continues to unfold, I’ll be sure to keep you updated on whether the odds of a greater sell-off are getting higher or not.

Until then, happy trading,

Imre Gams

Are you a short-term trader, or long-term trader? Why?

Let us know your thoughts – and any questions you have – at [email protected].