S&P 500 Update: The June futures contract has been consolidating within an active resistance zone over the previous week. The point to consider is the fact that the bearish pin bar that appeared off 2750 has not lead to any serious selling. Instead, it has lead to a triangle which often serves as a trend continuation pattern and currently the trend is bullish.
The S&P Summer Rally
If you consider the broader Elliott Wave count, this entire corrective structure going back to January appears to be a Wave 4 which implies higher prices ahead. Using that road map as a guide, and considering the higher low that was established off of the 2587 support, a bullish break out of this triangle over the next week is within reason.
Read previous S&P Reports For Broader View here.
Based on the current structure, even if price breaks lower, it can still revisit the 2683 (.382 of current bullish swing) and still be within a reasonable position to adhere to the summer rally idea. Now, when I refer to summer, I am talking about in the Northern Hemisphere of the planet which means over the next 3 months.
Typically, summer time trading in the stock market (as reflected by the S&P) is generally slower. In a stable market with no major fundamental surprises, a slow grind higher is very plausible.
Day to day behavior is often where you will notice the quiet times, especially around noon Est. which is considered lunch time. Many years ago, when I was day trading Nasdaq stocks, the more experienced traders would stop trading around 11 AM and not return to their computers until 1:30 PM. There are always exceptions, but on the average, do not be surprised if the volume patterns are similar.
Positioning For Higher Prices
If this market breaks out of this consolidation by taking out the 2746 level or higher, it is going to imply further strength for stocks over the broader time horizon. This means we will be looking for more short put opportunities to enhance current portfolio holdings. Buying stocks, selling puts, or taking swing trades in the futures markets (YM, NQ) are a number of ways to capitalize on the coming strength for you to consider.
The bullish breakout would be occurring within the 2710 to 2751 resistance zone (.618 of recent bearish structure). A breakout within a resistance zone is usually a cause of concern, but what makes this situation different is the type of formation (triangle) and the fact that selling activity is much less (based on initial touch back in April resulting in a swift sell off).
If this market breaks lower and retests the 2683, followed by a reversal, that situation can also offer an opportunity to add to positions, and sell puts for even higher premiums.
This All Goes Out The Window When?
If price closes below 2683, and there is no immediate reversal, then price is likely to go into to the 2650’s or lower. In this scenario, protective measures can be taken like an options hedge to reduce risk without having to exit shares. It really all depends on how quickly price falls through and what kind of formations appear in the process. As long as price stays above 2571, it can still be argued that the overall consolidation is still in play and we want to be looking for accumulation opportunities in particular stocks if this level is reached.
Sentiment Is The Driver
In summary, no matter how dramatic the news may be, or how ugly an economic report may come out, as long as price maintains the current structure, it is expressing a generally bullish sentiment. Price patterns are nothing more than the expression of sentiment playing out over a given period. Higher lows followed by triangles are patterns of strength, and until they are negated, it is reasonable to expect exposure to the long side of the market to be more favorable.
The S&P 500 can be used to help navigate portfolios as well as individual positions. Watch our portfolio strategies as we make adjustments to stock and options positions in order to capitalize on the generally bullish sentiment.
Questions and comments welcome.