If I had to guess the direction of the stock market over the next several weeks, it would be this…
Higher first, then lower – and maybe a lot lower.
VIX option prices were saying as much on Friday. Today, the intraday charts of the S&P 500 are saying the same thing.
For example, look at this 15-minute chart of the S&P 500…
If you look at the action on Friday, you can see how the index made a lower-low during the day. But the technical momentum indicators – the Moving Average Convergence Divergence (MACD) at the bottom of the chart, and the Relative Strength Index (RSI) at the top – made higher lows. This sort of “positive divergence” is often an early warning sign
that the trend is ready to reverse.
You can see how similar conditions at the end of the day on Tuesday led to Wednesday’s big rebound.
Keep in mind, this is a 15-minute chart. Patterns on this time frame tend to play out within just a day or two.
The stock market did indeed bounce a bit at the end of Friday. The odds are pretty good that bounce will continue at some point today, until the MACD indicator can rally back up to neutral (at about 0) and the RSI gets closer to overbought (near 70).
The 60-minute chart of the S&P 500 also supports the idea of higher stock prices over the next few days.
Take a look…
Just like with the 15-minute chart, the index made a lower low on Friday, but the technical indicators made higher lows.
Patterns on the 60-minute time frames usually take a few days to play out. So, based on this chart, traders should be anticipating higher prices going into the FOMC announcement on Wednesday.
After that, though, things get a little more bearish.
Here’s the daily chart of the S&P 500…
There’s no positive divergence on this chart. And, the momentum indicators are nowhere near oversold levels. So, there’s plenty of room for additional downside action.
The index is sitting right on the support of its 50-day moving average (MA – blue line) line at 3321. The 9-day exponential moving average (EMA – red line) and 20-day EMA (green line) are resistance overhead.
And, after trending higher for several months, both of these shorter-term moving averages turned lower last week.
That’s a bearish sign.
Given all of these considerations, and the VIX option prices we noted on Friday, it seems to me the most likely short-term direction for the market is higher for a few days. Then, we’ll head lower and play out the bearish setup on the daily chart.
Best regards and good trading,
Jeff Clark
Reader Mailbag
If you’ve had success using Jeff’s technical indicators during these volatile times, let us know your experience. And send in any questions you may have at [email protected].