Calm Before the Storm?

August 24, 2006 · Print This Article

Sideways trading continues as the summer doldrums are nearing the final stretch which is always good news for traders. Volume over the next few weeks will most likely continue to be slow as Wall Street has a tendency to take an extended vacation until after Labor Day has passed. Surely, volume will pick up after the biggest Wall Street Holiday, which hopefully means a widely vacillating market is right around the corner.

I still think we are due for a decline that will most likely test the 1280 level (give or take a few points) on the S&P. The next three trading days are historically, seasonally weak so the probability of a move that would close the gap from last Wednesday increases slightly. Furthermore, the S&P has had difficulty with overhead resistance so conviction among buyers could be waning. If we do test the 1280 area, the major indices will most likely move into an oversold area which should bring out the bulls. If this scenario does play out there should be a decent opportunity somewhere in there.

If the market is unable to move lower over the next three (maybe four) trading days I would be hesitant to take a short position purely on the fact that the market would be entering the end/beginning of the month seasonal bullishness. However, as I stated above, if the move lower does occur closing the gap from last Wednesday and we are in an oversold position right before the last trading day of the month, well, the stars have aligned and one of our options strategies could possibly have its second signal in as many weeks. Only time will tell.

RSI Wilder (5) for August 25, 2006