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Technical Analysis: Upward Trend Facing Uncertainty Over More Than Syria

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It's essential to look beyond the current situation and ascertain all the potential moves that will be driving the tape.

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Shallow men believe in luck or in circumstance. Strong men believe in cause and effect.
--Ralph Waldo Emerson

The 371-square-mile forest fire in Yosemite, ignited on August 17, is soon to be the largest on record in California's history (the current record is 430 square miles). It is now being claimed that the calamity was started by one man; a lone hunter.

Comparatively, on Thursday of last week, Fox News authored a piece which called the situation between Putin and Obama on Syria a tinderbox. Even though the Russians have indicated that they don't intend to go to war over a US strike on Syria, it's reminiscent of the Reagan Cold War era political ping-pong. With the lack of UN support, the tension can be cut with a knife as President Obama awaits the return of Congress in attempt to buoy support for a missile launch. Is this the first domino?

With summer officially over, the markets await numerous decisions before making their next move. The Syria situation is only the first in the end-of-year chess game that all investors, money managers, and institutions must play. Markets, whether bond, stock, or commodity (see below), do not like uncertainty and operate off of probabilities with emotion. Herein lies the challenge when making investment decisions about the current non-linear risk that's fused within the market's landscape. What level of exposure is prudent during these times?

Before answering this investor-exclusive question, one needs to look beyond the current situation and ascertain all the potential moves that will be driving the tape -- at least as far as horizon allows. The key is uncertainty, and when it will abate. In this instance, most of the foreseeable uncertainty stems from politics. With Congress back in session, Syria is only one of the subjects that has to be settled. To guess the outcome at this point is only a fool's errand as it is purely a matter of speculation. The breadth of consequential aftermath is too large to quantify at this point. Hence, a partial risk-off/hedged stance may be prudent. But does this remove the uncertainty?

Even if Syria were not foremost on the Congressional docket, there are still other matters that will affect the tape -- namely, the debt ceiling. Assuming all plays out well with the Syria situation (whatever that ends up looking like), there is a big political-posturing game looming that will immediately ensue. If recent history (the 2012 debt ceiling and sequester negotiations) can be seen as a forewarning, this is not going to be pretty. Meanwhile, the knight and rook -- the Fed tapering and Bernanke's retirement -- having already been established center board, are beginning to reposition themselves. One thing for certain is volatility will remain prevalent until these can be resolved.

Technically speaking, the general market (the S&P 500 Index (INDEXSP:.INX)), even with the latest volatility, has yet to break the upward trend it has been on since November of last year. A breach of this level (~1,630) is where my firm would send up a red flag indicating the probability of a further drawdown ensuing.


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Another Move on the Board

Along with the general equity market's recent rise in temperature has come another zone of increased volatility. Some traders believe this is where a potential play is beginning to form. In my firm's July 8 article, we discussed the 2.5-year technical formation of WTI (West Texas Intermediate), and with President Putin surprising world leaders at the G20 summit with his statement on Syrian aid, it has boosted speculation in the black-gold market.

Considering Syria is a vital trade route for Russia, not to mention the rumor that there's a high probability that Russia actually supplied Syria with chemical weapons, it adds a bit of clarity to the latest oil price precariousness.

Thus far the commodity has seemingly been held hostage to headlines surrounding Russia and the United States' decision to become involved. As oil continues to fight the $110 bbl resistance level, it has economists concerned about its impact on an economy still struggling to get by, even with "QE forever." If oil makes it through this technical level, the move could likely send oil prices to retest the 2008 levels near $140 bbl.

It now appears as if the remainder of the oil industry could follow in the commodity's footsteps, which is evident in the SPDR S&P Oil & Gas Exploration ETF (NYSEARCA:XOP). The ETF consists primarily of oil and gas exploration companies and has shown a reduction in volatility as it has been consolidating near resistance at ~$65. This indeterminate action further indicates the struggle between buyers and sellers is potentially waning. If the bulls do win the fight, the move through this level could propel XOP to higher prices in a similar magnitude to oil.


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The reality is there are still sizeable headwinds our economy and country must face, from the QE taper to the debt ceiling. Volatility is likely here to stay for a while, so buckle up and be prepared for anything.

Hope this helps and finds you well.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
No positions in stocks mentioned.

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