August 20, 2017

Short-term outlook remains bearish

The short-term bearish signs continue to pile up. Last week I mentioned several short-term bearish tendencies as the market moved into post-expiration.

  1. The week after June Triple-Witching has seen the Dow lower 15 out of the last 17 years.
  2. Strong resistance overhead (1540 in SPX) 
  3. Historical tendency for post-expiration weakness

Now we have another to add to the list.

The market traded in a fairly tight range during the latter part of last week and continued the trend today. Today the S&P (SPX) experienced one of the tightest trading ranges of the year. Going forward, a period of narrow, range-bound days, similar to the last three trading days, does not bode well for the market over the short-term.

It would be nice to see an overbought confirmation (to go along with the other bearish signs), at least intraday, in the S&P to increase the bearish edge. A test of the 1540 area should bring the underlying SPY close to an overbought area and could make for a nice short play. However, a sustained move above 1540 could negate any meaningful move to the downside. The S&P needs to move below 1530 and hold the move before for a short-term correction can be considered.

Certainly the S&P feels pent up in this area (1530-1540) and the longer it trades in a range the sharper the move once the range is broken. My guess is by the close Wednesday we will see the market lower. Wednesday of this week brings a seasonally bearish day with the S&P trading roughly 38% higher historically. The Dow (DIA) is even worse at approximately 33%. Remember, we are only speaking of a short-term move (1-5) days.

Overbought/Oversold levels for June 18, 2007

  • SPY –  63.8 (neutral)
  • DIA – 63.0 (neutral)
  • IWM – 63.5 (neutral)
  • QQQQ – 72.1 (neutral)
  • GLD –  51.5 (neutral)
  • OIH – 76.7 (overbought)

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