Thursday, May 8, 2014

Small Caps Still Trending Down While Blue Chips Grind Sideways

During the last few weeks, trading SPX has been the equivalent of playing a game of Whack-a-Mole, as it continues to head-fake its way to nowhere.  A few weeks ago, I wrote about why I felt this market called for patience, and nothing has changed since then -- ultimately, we have to respect that we're still stuck inside a three-month-long trading range.

Trading ranges frequently wreak havoc on trader psychology (and on trader accounts), and over the past few weeks I've watched some bears turn bullish, and some bulls turn bearish.  Traders often let their imaginations run wild inside trading ranges, as they grow more and more anxious waiting for the next directional break.  Of course, sometimes we want to ignore the fact that directional breaks may remain delayed for a long time, as the market reserves the right to continue grinding sideways for as long as it wants.

That said, I suspect we're finally getting close to a directional move.  In my perfect world, I'd still like to see a new all-time-high and a whipsaw, but this market is offering no guarantees right now.  The chart below is the S&P 500 (SPX), which has not yet broken this year's high.  Not shown is the NYSE Composite (NYA), which did break this year's high -- and that, coupled with the fact that we can count five waves up off the April lows, does require us to at least consider the possibility of a failed fifth wave without further highs (I alluded to this in the last update).

On an intermediate basis, the upper red trend line is still the key zone where more bullish potentials would begin gaining traction. 

The next chart is the 15-minute chart of SPX.  Because of the range-bound market, there's little in the way of key near-term levels right now -- pretty much everything is fair game within a range.  So, don't overplay these trend lines, since range-bound markets love to whipsaw.  It is worth noting that the uptrend from the April lows (red line) was broken recently, and SPX closed right on the back-test of that line.  Bears may try to make a stand and reject the advance here.

The Russell 2000 (RUT) has recently made a new low, and continues to look weak.  This suggests that "risk-on" is still absent from the current market.  It will be interesting to see if, at some point in the future, we look back on the SPX trading range as a giant distribution zone.

In conclusion, neither bulls nor bears have been able to get anything accomplished in SPX for the past few months -- but bears are getting things done in RUT and in some other high-beta markets.  Bond bulls are also getting things done in the long bond.  And, unless something changes, those are two of the reasons why I continue to suspect the balance of power may (also) shift to bears in blue chips over the coming weeks.  Trade safe.

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