Consolidating Gains

 


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The sentiment indicators in mid-October suggested most investors were expecting the market to fall further. However, sentiment is a contrarian indicator. Currently, many sentiment indicators are far less bearish. For example, the latest American Association of Individual Investors data showed 43% are bullish and 28% are bearish. Last week, 32% were bullish and 46% were bearish.

The chart below is an SPX daily year-to-date chart. The current SPX pattern is similar to the late May pattern (see vertical line). The similarities extend to indicators within, above, and below the price chart, and many exogenous technical indicators. One notable difference is the current rally is about two weeks ahead of the previous rally.

The steep rally suggests consolidation next week and the following week, until options expiration in two weeks. SPX closed at just over 1,220 Friday. Short-term resistance is at the extended Price-by-Volume bar at 1,220 to 1,230. Short-term support is at the 50 day MA, currently at 1,210. So, SPX may trade in a narrow, and volatile, 1,210 to 1,230 range over the next two weeks.

November Max Pain expirations also support a consolidation. Some November Max Pain points and values are: SPX 1,205 with the value of puts over six times greater than the value of calls (which is bullish, since the put/call is a contrarian indicator). OEX (S&P 100) 555 with the value of puts roughly 50% more than the value of calls. OEX closed at just over 562. QQQQ 39 with the value of puts over 100% greater than the value of calls. QQQQ closed at just over 40. The bullish put/call values suggest these Max Pain points will rise over the next two weeks.

The economic data last week revealed above trend output growth, a better than expected rise in personal income, slow employment growth, and weak factory orders. However, the 4.1% rise in productivity, last quarter, calmed the market. High productivity helps dampen inflation and contributes to profit growth. Inflation and profits have been the two most important factors concerning the market.

Normally, I wouldn't make a comparison between only two periods. However, the market sometimes creates a self-fulfilling prophesy that works well for a while. Also, the intermediate-term technical indicators are bullish enough for SPX to at least test multi-year resistance at around 1,250 by the end of the year. Moreover, economic growth has slowed and inflation has increased (stagflation may be inevitable). However, over the next few months, the economy will continue to maintain above trend growth, while inflation is generally under control.

Charts available at PeakTrader.com Forum Index Market Overview section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e. g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

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