It was yet another boring trading day on Monday — well, at least it was St. Patrick’s Day. Boring, you say, with the indices rallying 1%?
Considering that most of the action came in the first 30 minutes of trading, after which the indices settled into a sideways trot, I would say Monday was more of the same of what we have been seeing over the past two weeks.
I deem Monday’s “Putin Rally” to be a combination of a relief rally and oversold bounce, but nothing more. In other words, headline risk remains high and news flow will thus unfortunately likely determine the near-term direction of the stock market and other risk assets.
Yet the Ukraine/Russia crisis is not all of the uncertainty currently in the air. Wednesday was Fed Chair Janet Yellen’s first FOMC meeting, and that is keeping more than a few traders on the sidelines, rightly so I might add.
Two things before I walk through the charts:
1. Have you noticed that Tuesday’s trading direction is very often the opposite of Monday’s?
2. Have you noticed the important mid-morning directional change that we often see at 10:30 a.m. EST in stocks?
Those are two important phenomena to be aware of, particularly the former considering the current geopolitical risks.
In terms of the charts, the benchmark S&P 500 index may be down from its highs, but it is not out. Considering that lasting breakouts often revisit their breakout points, the retest of the 1,840-1,850 area over the past couple of trading days has done just that.
Also, for those bulls squinting to look for something positive, I will point out that the last three trading sessions have formed a morning star candlestick formation. This type of formation sees a sell-off on day one, is fairly unchanged on day two, and on day three, we get an up gap and bullish trading.
This more or less describes the past three trading days, but considering the headline risks abound, I for one, have learned to take technical analysis with an extra grain of salt during times like these. For me to leg into more bullish positions I would need to see confirmation of Monday’s rally.
Support and resistance levels for the S&P 500 remain the same as I laid out Monday morning, namely support at 1,840, followed by 1,800-1,810, and my multi-month upside targets between 1,920 and 1,970.
As I discussed Monday, the utilities sector is showing relative strength versus the S&P 500. On the chart below, I mapped the SPDR S&P 500 (SPY) versus the Utilities Select Sector SPDR (XLU), and the relative weakness of SPY is visually apparent.
A break below the black neckline would have further bullish implications for utilities, at least on a relative basis, over the medium term. Again, I emphasize the “relative” aspect here, i.e., this does not mean that the S&P 500 is ready to dive just yet.
Another ratio chart that I like to use for perspective is that of SPY versus SPDR Gold Shares (GLD). The ratio recently broke its late 2012 uptrend, meaning that gold has strengthened not only in absolute terms but also in relative terms.
I am taking the developments on both of these ratio charts as a first warning sign that over the medium term — 3 to 9 months out — this cyclical bull market may finally be coming to an end. More near term, and at least for the coming months, I think equities have some more work left to do on the upside as per my aforementioned upside targets for the S&P 500.
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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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.