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Patience is a virtue


Last week began with the promise of a market that appeared poised to break out to the upside on what would hopefully be better than expected earnings reports and guidance. This week begins with the promise of a market that is poised to break down on what could only be considered disappointing earnings and guidance from various technology bellwethers at the end of last week. The financial markets continue to get whipped around because there is not enough conviction in either the bull or bear camp to generate a sustainable move in either direction. As a result, traders and investors are left with a very difficult environment where the best trade is that of patience.

Over the past couple months I have been talking about the twilight zone, which in English is a trading range environment. In terms of the S&P 500 (SPX) I have been using 875-945 as the near-term range. Entering last week, the SPX was at the upper end of the trading range, reached into overbought territory and began losing momentum in the early part of the week. As we turn on our computers today, the SPX is in the center of the defined near-term trading range and is quickly working off the overbought condition through the loss of momentum (Exhibit 1). This suggests that at some point over the next week or two that the market could be at the low end of the trading range and be oversold. It makes very little sense to be aggressively buying until either the market becomes oversold or falls into support - or more importantly both at the same time.

Exhibit 1 - Patience should be name of game in the range.

As the near-term pictures continue to reinforce patience, I wanted to move out a little bit in my time frame and look at the two-year charts. Changing the time frame of the charts you use can change the perspective and intermediate-term opinion. An old joke among technicians is; if you want to find a chart that fits your opinion, just change the timeframe. In this case, changing the time frame does little to change the view that this market is in the twilight zone.

Since the low in October, the market has been in a pattern of lower highs and higher lows. Drawing a line on the tops and the bottoms creates a triangle. Typically, this type of pattern is a consolidation pattern where the earliest sign of the next direction can be discovered when a move takes place that is outside the triangle. Frankly, the odds favor a downside break because many times a this type of pattern could also be considered a continuation pattern, meaning that the consolidation is simply a pause in the prior trend. The good news is the SPX is getting to the apex where a move out of the pattern should happen in pretty short order.

Exhibit 2 - Consolidation pattern suggest patience should bring clearer signs of next meaningful move.

The pattern isn't so obvious for the NASDAQ Composite Index. Truth be told, the market is being whipped around by what happens in the tech sector so looking for directional signs there is important as well. While the patterns aren't as clear for the tech-weighted index, the story is the same. The NAZ is also in a trading range where the most recent up move wasn't strong enough to generate a higher high and the last down move wasn't strong enough to create a lower low. The only thing that is clear is the lack of significant buying power and selling pressure. An environment like this leads to solid trading but limited investment opportunities, thus creating frustrating whipsaws.

Exhibit 3 - The pattern on the NAZ looks a little different, but reinforces the range thesis.

I have good news on two fronts. First, the equity markets seem to rapidly approaching the point where better signs of the next significant move should begin to appear. Second, if that is true, you won't have to read about the twilight zone too much longer. Have a great day.
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Don't tell Daisy I feel whipped - by the markets that is
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