Expect Volatility to Reign This Week
Once S&P 500 Index congestion is breached, resolve will follow.
-- Friedrich Nietzsche
It’s always interesting to have the ability to analyze observers’ clashing perspectives after touring an art gallery. Perspectives are ingrained from education, personal experience, and even emotional state. These incongruities also happen -- and quite often, I might add -- with financial analysis when the market becomes directionless. As the summer continues and we get closer to the halfway mark of July 4, the markets have yet again returned to a position of indecision.
“Again" -- that’s an understatement. Since the 2009 secular channel low, the market (S&P 500 Index (SPX)) has been attempting to reach the top of the channel (~1,550). In doing so it has succumbed to two, now possibly three, major consolatory drawdowns (~17 - ~20%). This type of continued volatility is nearly unheard of, at least in this century.
When analyzing these uncommon trends, separate perspectives become abundant. What should investors listen to?
From my firm's perspective, listen to the risk. When analyzing the trend volatility over the last three years, we can ascertain that the most probable intermediate-term support is ~1,160. This analysis suggests the current risk, from April’s high, is approximately 18% and an additional 13% from Friday’s close. But yet we began this piece by taking about indecision, not a probable drop or bear.
To understand if this risk will be reached, we have to look at things on a more granular level. Shorter-term the SPX has put in recent lows at 1,280 and last week retested May’s 1,360 break, hence the range of indecision. It is our belief that once this area of congestion is breached, resolve will follow. Nevertheless, it is a week in which volatility will reign due to continued headlines from Europe and quarter-end window dressing.
We hope this helps.
Editor's Note: Read more at Tesseract Asset Management.
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