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Jason Haver: SPX, NYA, and QE -- Distribution or Consolidation?


The market should finally be close to breaking out of the trading range.

I'm a firm believer that the recent bull market has been driven largely by money printing from the world's central banks, and specifically by the Fed's quantitative easing programs. I've given verbose arguments in this regard many times, but the short summary of the argument is that the printing press creates liquidity, and liquidity drives the market.
Let's look at a chart of the S&P 500 (INDEXSP:.INX), since a picture is currently worth 18,967 words (remember back in the '80s, when you could buy a picture for a thousand words? Yet another example of inflation.) The chart below highlights some of the central bank programs that seem to have been intimately linked to the five-year bull market.
I originally published this chart back in November 2012, as part of (what was then) my long-term bull argument for equities. The question now is: What happens in the coming days, as the Fed tapers the QE program? Based on prior history, we can assume that as Fed money-pumping slows, so will the market. But I think we also have to look a step further and ask: If/when the shrinking liquidity pool hits the tipping point and the market reacts negatively, what will the Fed then do in response? I mention this because a lot of bears are looking forward to the end of QE and the presumed resumption of a "natural" market -- but the Fed can, of course, always reverse policy again if it doesn't like the results.

Click to enlarge
When we look at current charts, we can see SPX has been in a trading range (or "chop zone") since February. The challenge is that near-term chop zones can turn the charts into the equivalent of a Rorschach inkblot test: Bulls see bullish patterns, bears see bearish patterns, dogs see patterns that look like bacon, Cookie Monster sees cookies, etc. 
This is one reason I would strongly caution against reading too much into the classic technical patterns that seem to materialize within a trading range -- and especially caution against trying to ride them to their classically expected price targets. Trading ranges do funny things, and the main success I've ever had with them comes in identifying them early enough, then selling the high end of the range and buying the low end. That works until it doesn't, at which point your profits should trump the money you lose when the pattern finally breaks and you're stopped out.
Due to the near-term chop zone and the myopia it induces, I want to look at a broader view of SPX. I'm not going to republish the 30-minute SPX chart in this update because there's been no material change therein, so please refer to prior updates if you missed it.

Click to enlarge
Not shown on the chart above: The 50-day moving average on SPX currently crosses 1834. In the event of a breakdown, that zone is worth watching simply because other traders pay attention to it -- and in a bull market, that means there are often standing buy orders near the 50 DMA.
A couple of other charts not shown in today's update that bear honorable mention: 

1. Nasdaq's (INDEXNASDAQ:.IXIC) volume declining has spiked to the highest levels since October 2012. It's not unusual for volume declining spikes to indicate an approaching bottom.

2.  The Dow Jones Transportation Average (INDEXDJX:DJT) invalidated the bullish triangle count. The first meaningful resistance zone in TRAN is now 7480 +/-.
Next I want to look at the NYSE Composite (INDEXNYSEGIS:NYA) because, of all the chop zone charts, this one may have the cleanest wave structure. The red trend lines are where nimble traders might play, but we still have to respect the larger range.

Click to enlarge
In conclusion, SPX and NYA are both near the lower end of the trading range. Due to the larger trend, this is probably the bears' last shot to break these markets down, so any strong bounces from here would likely lead to new highs. In the event of a sustained breakdown of the 1834 zone, then SPX's pattern could be seen as a double top, which suggests a textbook target south of 1800. Trade safe.
Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

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No positions in stocks mentioned.
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