Some general chart observations for this Memorial Day weekend:
Welcome to the chop zone, the place where the conviction of both bulls and bears get tested as markets relentlessly ping pong in a tight price range for often weeks on end. It’s a day trader’s environment and requires flexibility. One may also refer to a chop zone as a consolidation phase, many times occurring before the next move higher or also resulting in coming breakdowns.
The relentless back and forth over the past few week’s has been particularly testing as the action has been marked by sudden gaps, ramps and dumps alike shaking traders in every direction multiple times:
If you caught every move raise your robot hand.
If you didn’t, you’re human.$SPX pic.twitter.com/DOpeXBxLAu
— Sven Henrich (@NorthmanTrader) May 25, 2018
Generally chop or consolidations eventually resolve themselves and can imply moves the size of the consolidation range, either up or down:
Ironically the current chop zone is so tight in range a break in either direction would target a price zone still between the broader January/February range.
Is the current action either bullish or bearish?
Let’s keep an open mind I say, but let’s observe the broader picture.
Firstly note that markets have benefitted from weekly gap ups. 7 in a row to precise:
Magic Gap Up Mondays: $SPX
— Sven Henrich (@NorthmanTrader) May 21, 2018
I will note that, as persistent as the weekly bid has been, most of these gaps have filled and still the 2750 gap has not been managed to be filled.
Looking at $DAX and $NIKK we can observe multi week rallies in tight channels that have so far produced lower highs:
Bulls can find comfort in the repeated defenses of the 100MA last week:
Yet these defenses have come at a price, and that is volatility compression. As noted in Volatility Crossroad the $VIX is engaged in a potentially very bullish pattern formation:
This pattern has not been invalidated as of yet and last week’s price action on the $VIX was quite fascinating to watch as $VIX played a very precise game of ping pong within its tightening pattern:
It should be noted that even a spike lower in the $VIX (should it occur) to fill its lower gap for example may not invalidate the larger pattern.
What is also notable is that the volatility compression just below the 2750 gap zone on $SPX is occurring in context of still potential larger bearish pattens on major indices:
Leaving larger risk zones in play should prices revert below the 100MA on $SPX accompanied by a $VIX breakout for example:
For now the current chop has produced a rather neutral picture as $NYMO, for example, is neither oversold nor overbought:
One particular area of concern for bulls should be high yield as its chart has not managed to recapture its recent broken trend line:
This chart too remains in a wide price range, but a further breakdown here could imply pressure on equities, hence it remains a key chart to watch.
The main message here from my perch: $SPX remains in a broader 150 handle tradable chop zone. Not until a confirmed break above 2800 can bulls consider the range action to potentially resolve bullish, and bears must a see confirmed break below 2650 to develop a sense that the February lows can be broken to the downside.
Until then, chop away, but watch that $VIX 🙂
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Categories: Market Analysis
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