Weekly Outlook: Any Further Pullback Should Be Mild

After 4 weeks of big gains, the markets are pulling back a bit this week thus far. The downside damage has largely been contained so far, and the selloffs are relatively small when compared to the magnitude of gains seen in the markets since mid-July. One concern from a sentiment perspective is that the CBOE Equity Put/Call Ratio hit an extremely low level in recent days ... it was the lowest reading since July 2007, which was shortly before a major market top. The major event this week that investors and traders are watching is the FOMC announcement, which is due Wednesday afternoon around 2:15 pm est.

We mentioned last week that the CBOE Volatility Index (VIX) was "stubborn" around the 25 level and looked to possibly move higher (and not go lower than 22.5 anytime soon). As you can see on the following chart, we have moved a bit higher in the VIX. However, we have reached the Top Bollinger Band (which have narrowed recently), and the 2 previous tests of the Top Band were followed by moves lower in the VIX. The VIX does not look likely to go above 28 in the short-term, with 25 remaining a key level.

Click to enlarge:

VIX Daily Chart


We mentioned last week that the S&P 500 (SPX) and Nasdaq Composite (COMP) broke above the key 1,000 and 2,000 levels, respectively. As of time of publications, we are back below these round levels on both of these indices. Nonetheless, it does not appear a major selloff is imminent, and we have technical support below current levels due to the strong uptrend since the March bottom.

Click to enlarge:

SPX & COMP Daily Chart


Stepping back to the longer-term SPX Weekly Chart below, you can see that we have rallied up to reach near the Top Acceleration and Bollinger Bands ( aqua and purple trendlines). This is a potential resistance area, however ... a security in a strong uptrend will often "hug" these Bands higher or even break above them. So, this is not necessarily a sign of a pullback. Weekly Percent R is at a very strong reading near 94 ... that does indicate that we could have a "healthy" pullback to lower Percent R levels while still remaining in the underlying uptrend.

Click to enlarge:

SPX Weekly Chart

Bottom Line: A bit of a market correction appears to be in place, but it looks mild. The buying pressure that we have seen in recent weeks is still in place to a certain degree, which should buttress any selloffs, perhaps keeping us within a bit of a consolidating trading range (or an upward trending range).

Disclosure: None

Comments

[storm999:]

Graham Summers has an article on Kitco.com analyzing NasDaq. The Relative Strength Index (RSI). The RSI is at 75 and historically the last five times it's been over 70 there has been a 20% correction.
Check it out. www.kitco.com/ind/Summ...

I sold all my long tech positions Monday. I was up and average of 40% in 4 months. I think a 15-20% correction is due, when people realize how much U.S. consumption is down. It's not just 70% of our economy, it's 17.5% of the world economy.

Aug 12 02:42 PM

[Susan Weerts:]

Correct me if I am wrong since I am not a big tech person. Being top of bolliger band doesen't necessary mean that Vix will go down after hit the top of 28. The bolliger band can widen and the upper bound can increase.

It appears to me that after enduring a long down tunnel, the vix appeared to be flatten out and the bolliger band width started to be narrow. At least three scenio would rise from it
1.If vix retains the current tunnel, any pull-backs will be mild.
2.Vix might continue its downward movement, which indicts risk waning. Given the current herd behaviors of risk taking, we might charge on.
3.Vix might reverse its trend and band width started widen, we will have much severe pull backs then.

Aug 12 03:01 PM

[Jasper M:]

Anyone discounting downside risk at this point is selling tickets to a theater that is already on fire. The downside at this point is positively generational.
I believe a technical analyst should know better.

Aug 12 04:46 PM