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S&P 500 Lacks One Leg; May Stumble

Markets were up slightly once again on Friday. But while managing to hold, markets have lost a little momentum the past two trading sessions. The S&P 500 chart has already broken above its rising channel pattern (green and red slopes), but it is lacking a leg for a full five-point reversal. Because of this, we think that resistance won't likely turn into support, and the market will fall back into the pattern for the meantime to finish off its duration. The MACD also indicates an overbought level as of the moment. I still won't short this market though I feel the desperate bears are already getting giddy...



What does a five point reversal mean anyway? Whatever consolidation pattern a stock or index is in, the full duration of the consolidation is completed by 5 "legs". That starts with Leg 1 (down), Leg 2 (up), Leg 3(down), Leg 4 (up), Leg 5 (small down or sideways). The S&P 500 is lacking one leg, so the risk:reward ratio at these levels are not favorable. That last leg which is a small trading range or pullback is needed to take out some additional supply (those who both near support). The market can't continue to move up without encountering selling from people who were able to buy cheap. But given the fact that only a relative few were able to buy on the dips in this market, the correction won't be too deep.

I treat any correction to be a healthy one... eventually we will head back higher. For the short-term, also watch the US dollar and crude oil chart to see if they signal any short-term tops in risk-taking. Happy weekend!
Disclosure: None