This Chart May Hold Clue to Market’s Next Move

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The trading week started off with a bang. A host of oversold readings coupled with a rally in China overnight and supportive comments from Federal Reserve officials helped lift stocks.

Part of the reason for the year-to-date range-bound U.S. equity markets is the focus, uncertainty and fear surrounding an initial interest rate hike for the first time in nearly a decade. With only a few weeks left until the potential September liftoff in interest rates, and this week being riddled with Fed speakers, the market needs to make up its mind soon as to whether it wants to price in a rate hike or not.

Monday’s rally was led by some of the biggest laggards of the year, namely the energy and materials sectors, and single-name stock black sheep such as Twitter Inc (TWTR).

They say that the sharpest rallies occur in bear markets, which energy is clearly in, so traders should be accustomed to sharp countertrend bounces by now. Some may be asking whether Monday’s bounce is the beginning of a new major bull market in the energy sector? I doubt it for a number of reasons, one of them being that the U.S. dollar looks to have plenty of room to climb in the medium term and possibly over the next couple of years. But I still see a trading opportunity, which I cover in the Trade of the Day.

Monday was a classic risk-on day. The dollar and bonds were sold while the S&P 500 bounced right back into the middle of its multimonth range. One could have alleviated a great deal of pain this year by just buying the lower end of the range and selling the top. Of course, it’s never that easy and hindsight is 20/20.

For now, Friday’s bump into the 200-day moving average (red line) once again held as the market gapped up at the open on Monday and was off to the races.

S&P 500 Chart
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Where will we go from here? The following chart of the Dow Jones Industrial Average offers a clue…

Dow Jones Industrial Average
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There is another curious phenomenon that has taken place repeatedly this year, and something that I also discussed last month. Next Friday is equity options expiration day for the month of August. A quick glance at the chart below shows that each options expiration week this year has seen sharp rallies that set multiweek tops for the market.

Conclusion

Given this pattern, stocks look to have further upside into next week. We could see the S&P 500 retest the 2,120 area and maybe even extend up toward 2,150.

By the way, notably absent in Monday’s rally were momentum darlings such as Facebook Inc (FB), Netflix, Inc. (NFLX) and Google Inc (GOOGL), which helped propel the market higher in early July. All of those names look intermediate-term overbought (see the NFLX Trade of the Day). If they indeed are getting tired, then it is just one more leg that is getting wobbly underneath the broader market.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-chart-may-hold-clue-to-markets-next-move/.

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