Technical analysis will always have a place in my heart.
Recently, that has all but gone out the window in the stock market. Bearish technicals have shown up time and time again, but the bulls have held their ground recently. I have reason to believe this may be their last stand.
The indicators are showing some major glaring signs for investors and traders alike. Those shorting the market have been on the back end of the trade recently. This, most likely, will change in the next two weeks, as I believe the bears will come out of hibernation yet again. The S&P just broke the 50-day MA, and three lower lows only add to the bearish signal. The slow stochastics still have room to run until an oversold signal is reached. Also, with the market closing in the red on Tuesday, the MACD has crossed over, signaling yet another bearish signal. I believe now, since the 50-day MA has been broken and the MACD has crossed over the S&P 500 (NYSEARCA:SPY), the market will push lower to the next resistance line of 2040.
But bulls in the crowd will see this chart and proclaim, "The technicals violated the head and shoulders pattern on the chart, therefore it is a bullish sign."
Well, yes and no. Yes, it did break the pattern, but only briefly. A failed breakout time and time again will take its toll on investors' emotions and resolve. Some investors will come out of the woods to buy the dip, but I think there will be a better entry point at a later time. I will be closely watching the economic data coming out this week, as it will paint a better picture for the next two weeks. I myself have already pulled out of all long positions except for DHT Holdings (NYSE:DHT), Prospect Capital Corp. (NASDAQ:PSEC), Visa (NYSE:V) and the Energy Select Sector SPDR ETF (NYSEARCA:XLE). I will wait and sell bear call spreads on until the market has reached the bottom and there is "blood in the streets". My target for the S&P 500 is 1800. At that point, I will be looking to get long again in my positions and write covered calls.
I expect the market to stay weak until the dust and uncertainties settle in regard to the Fed, Brexit and the election. Some analysts have called the start of a bull market in the summer months, but I find that to be a long shot. I firmly believe that in order for the bull market to start back up again, corporate earnings must improve. Currently, I have a year-end price target of 2050 for the S&P 500, and investors and traders should not expect the market to make new highs until the middle of the 2017 or later. However, a derailment in economic fundamentals can push this timetable back even further.
If the Fed does surprise us and hike rates today (anything is possible!), expect the 200-day MA to be broken by the end of next week as the S&P 500 pushes closer to the 2000 mark. Though the May jobs report came back extremely weak, Yellen kept stressing it was only one data point, and we will see today if that has swayed the Fed's decision. That may be the Fed's way of telling us June or July is not off the table, and to not get too dovish. A lot of people have hedged their accounts around the 200-day MA mark, so it will be an interesting time when/if it reaches there. Another point worth mentioning is the "leave" camp across the pond has started to gain some momentum, according to recent polls. This, I believe, will be the fuel needed to start the pullback on the markets.
There is, of course, the possibility that the Fed does not raise rates in June, and the UK does not leave the EU, and everything remains at status quo. If these two events do not happen, I would expect the markets to stay pretty much range-bound, with support around 2040 and resistance at 2130. A very tight trading window indeed, but depending on your style and expertise, a wonderful trading opportunity. Options traders will be rewarded greatly during this time.
In summary, now may be a good time to lighten up on your winning longs and go to a more defensive position. With technicals starting to show weakness and continued weakness in market fundamentals, we are only one small shock away from a large correction. I am not calling for a full-blown recession just yet; however, the market will not stay close to the all-time highs for much longer. Options traders would do well selling vertical bear call spreads at a mark above the all-time highs on SPY until the uncertainty settles later on in 2016.
I myself will be keeping a sharp eye on data and the markets today.
Happy investing, and please subscribe below!
Disclosure: I am/we are long PSEC, DHT, V, XLE, SHORT SPY THROUGH BEAR CALL SPREADS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.