The S&P 500 is Taking a Respite at All-Time Highs, What’s Next?
The S&P 500 and SPY ETF had its first (-1.3%) intraday pullback on Thursday. This action appears to be nearing the end of the recent distribution/rotation that we have discussed during our Livestream broadcasts over the past couple of weeks. There is the potential for further downside, as insitutions position their portfolios into the Fall.
S&P 500 – Potential Short-term Top
The S&P 500 Equal Weight Index is referenced. To the casual observer, there is an underlying head and shoulders pattern printing out, as more institutions take profits off the table. The number of stocks trading above their 50d moving average has fallen back to a more comfortable 50%. CCI is setting up a buy signal. All we need is a trigger (catalyst).
S&P 500 Seasonality
This most recent consolidation appears to be distribution at all-time highs, as institutions prepare for what could be a short-term opportunity into the seasonally strongest months of the year. We have been taking profits off into strength as well, systematically cutting back on the number of open positions and reducing the size of those positions that remain in our portfolios.
In addition, fear is picking up as the S&P 500 pulls back from all-time highs. VIX moved higher this week, after trading below the 50d for over 11 trading days. NYMO is also near extremes, registering (-63 +/-) on Thursday. The put/call ratio signaled a rush to puts yesterday.
Taken as a whole, the S&P 500 chart above has the potential to bounce and follow-through on this favorable NFP report. Anything short of a break to fresh all-time highs would likely lead to a head and shoulders confirmation.
Therefore, we are watching the potential right shoulder over the next few trading days. If the S&P 500 breaks the neckline at 2875 (+/-) a 60 point measured move would bring the index back to the August pivot lows.
We have also been selling covered calls on high IV rank positions, in an effort to bring down our cost-basis and collect income while the markets remain range bound.
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