Which Way Will the Market Break?

Last week, it looked like the market’s price range was tightening to such an extent that an explosive move could be expected. Instead, the price range tightened even more. Sooner rather than later, the market will be forced to break in either direction. A move above the $92 area on the SPY and $30.50 QQQQ would likely rekindle the march upwards.

There are several factors that favor the bulls. First, the uptrend is still intact (see charts below). Second, the Volatility Index continues to decline. The VIX closed below 50- this week for the first time since November 5th.

One point favoring the bears is that the Dow Jones Industrial, the S&P 500, the NASDAQ, and the Russell 2000 are having difficulties with their respective 50- day moving average. On December 16th, SPY and QQQQ pierced their moving averages on decent volume. Since then, the indexes have had trouble continuing upward and have now fallen below the 50 DMA. A definitive move above or below the 50 DMA on any of the aforementioned indexes has yet to occur.

Another point to consider is the inability of the small-caps to take the lead. The continued reduction in interest rates generally favors smaller companies. While it is not necessary for the market indexes to tick higher, it is certainly a positive sign. A review of IWM reveals a chart similar in nature to the rest of the indexes - an uptrend albeit one challenged by its 50 DMA.

So, where do we go from here? This past week was the last full week of trading before the holidays. While a breakout from the current range in either direction is likely over the next several weeks, it will indeed occur on lighter volume. While the real market action will not take place until 2009, that does not mean some trading opportunities might reveal themselves, assuming a trader practices disciplined risk management.

Disclosure: No positions in any stocks or ETFs.

Comments

[sr9web:]

"No positions in any stocks or ETFs"

No skin the game?

2008 Dec 21 05:03 PM

[herbert hoover:]

"No positions" is the smartest way to preserve capital at this stage.

2008 Dec 21 05:48 PM

[John Lounsbury:]

What is even more difficult about these flag patterns is that none of the most signifcant candle patterns are occurring to help figure out the next move.

2008 Dec 21 08:03 PM

[John Lounsbury:]

One key divergence is seen in the S&P 500 chart. Since December 1 the price has trended up and the volume has trended down. This is one of the few chart signals seen in this time period and it is pointing down.

I have learned to be careful with single indicator signals, so I am still waiting and watching for a good timing move.

2008 Dec 21 08:06 PM