Let’s take a look at where the S&P 500 has been, where it is now, and where it might be going. Options trading investors may have noted that current prices in the S&P 500 Index Options (CBOE: SPX) are sitting on the edge of a fence. We could be looking at an intermediate bottom or it could end up being a bull trap.

My recent prediction for lower prices has indeed come to pass, but from hereon I have no real idea where price action is headed. Mr. Market is leaving a few clues behind which I will outline, but anything is possible. We have seen stocks climb a wall of worry for nearly two years now so there is precedent for a rally from this current point of indecision.

The daily chart of the S&P 500 below illustrates key technical levels on the daily chart; however readers will notice that we are currently caught between a ton of overhead resistance and a key support level. Until we see price move in either direction with volume confirmation, I will be sitting on the sidelines.

S&P 500 Index Options (CBOE: SPX)

As can be seen from the chart, price action is currently sitting above the 20 day moving average on the weekly SPX chart. Key support levels are around the 1225 and 1180 price levels. I would also point out that a Fibonacci retracement of the recent pivot high to the recent pivot low gives us a possible 1.618 retracement around the 1190 price level.

At this point, some might think I’m outlining the case for lower prices in the equity market. I honestly have no idea where price is going; I’m just outlining some key aspects that I have found in my analysis to the downside. The upside is just as likely and we could see the SPX price bounce off of the 20 day moving average on the weekly chart and a challenge of the recent highs could play out. Should recent highs give way to breakout, the SPX would likely test the 1,400 price level at some point in the future.

If we look at the CBOE Volatility Index (CBOE: VIX) for any clues, all that can be seen from that chart is a spike higher and a subsequent sell off as fear and uncertainty leave the marketplace. The VIX is currently arguing for higher prices in equities, however the financials represented by the Financial Select SPDR (NYSE: XLF) are the fly in the proverbial ointment. The banks were unable to attract a bid on Monday’s strong advance and they experienced additional selling pressure on Tuesday.

In fact, the XLF’s daily chart shown below reveals a key test and subsequent failure.

Financial Select SPDR (NYSE: XLF)

A quick look at the XLF chart shows price moved higher off of the recent lows, tested the 20 day moving average and rolled over. Price is currently below key support levels, but we could witness a reversal. I am going to be watching XLF quite closely in coming days as I believe the banks will provide indicators where prices will be going. Right now it would appear that Mr. Market is favoring lower prices, but that would seem a bit too easy from these eyes.

We could consolidate at these price levels for a period of time. The volume on Monday and Tuesday was light and we have non-confirming signals showing up in a variety of underlying indices. I am unwilling to accept any directional risk at this point. I will let others do the heavy lifting while I sit safely in cash and watch the price action play out.

Right now I believe the prudent thing to do is remain in cash and wait for Mr. Market to signal which direction he favors. We are either sitting at the beginning of a major move higher or we are at a precipice and prices are about to plunge. Either way, risk remains high and the risk / reward is simply not there to warrant an entry. As I have said many times, sometimes the best trade is no trade at all!

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