Mid-week trading update: This morning started off well for the bears – until oil prices began to rally. I wrote on the weekend that while my inner investor was constructive on stocks, my inner trader still believed that downside risk remained. Those views are unchanged.
Here is where the SPX stands today. The rally was unable to overcome technical resistance earlier in the week at 1950 and at the 50 day moving average (dma). Moreover, the 5-day RSI flashed a sell signal by moving from an overbought reading (above 70) and then falling below 70. Two overnight gaps (shown in yellow) had the potential to get filled as the market weakened. The first gap got filled this morning, but stocks rallied intra-day.
As of the close on Wednesday, breadth readings from IndexIndicators show that the market is still overbought (red dot my estimate), which may serve to limit any short-term upside.
On the other hand, the setup for a Zweig Breadth Thrust buy signal remains in play and the market has until this Friday to move the ZBT Indicator from 0.615 to trigger a buy signal (for full details see Bingo! We have a buy signal!). Readers who want to follow along at home can click on this link for intra-day updates on the progress of this signal.
Prepare for more volatility
My interpretation of these technical cross-currents is traders should be brace for more chop, at least in the short run. Neither the bulls or bears have been able to demonstrate that they can seize control of the tape.
For the bulls, they need to either rally the market sufficiently to either generate a ZBT buy signal or overcome resistance at the 50 dma and 1950. The bears, on the other hand, need to push prices down to at least fill the second gap at 1865-70, or at least alleviate the overbought readings.
Until that battle is resolved, both camps will find directional bets frustrating. My inner trader is still leaning short with a small SPX short position.
Disclosure: Long SPXU