An Epic Battle

On a longer term weekly perspective, the US stock market SP500 index has rallied from the February correction bottom now to just below July 2015’s prior $2126 highs as it closed the week at $2096, just 30 handles lower. With the bulls knocking on the door of all-time highs, a breakout and hold could open up the door to a huge rally, as the resistance void that would be created has the possibility of producing a price vacuum sucking stocks much higher. If you want to see what that looks like go check what happened to the SP500 as price broke out to new all-time highs in the second quarter of 2013. I am not saying that is what will happen rather just that it is one possibility we need to be aware of.

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The bears haven’t thrown in the towel just yet though. Last week’s candle formed a cautionary gravestone doji thereby adding the 2nd of the 3 necessary for a bearish reversal shooting star pattern. To confirm this pattern, the bears need to close the index lower next week, preferably below the first candle in the pattern otherwise the pattern will be considered dead and void. 

Taking a look at a shorter term daily chart below, you can see in the upper pane of RSI momentum we formed bearish double divergence. While divergence is not a sell signal, it is a warning price has gotten ahead of itself and warns of, at least, a pause, or worse, a correction.  For the past 2 ½ months price has been contained within the (red horizontal) trading range but finally broke out to the upside on Wed. Friday we fell back into the range warning of a false breakout. We still need confirmation and follow through next week but if the false breakout sticks, it raises concern about the potential of “from false breaks comes big moves in the opposite direction”. Notice too, how the volume (bottom pane) on the breakout was lackluster, well below its average telling us not that the bulls were strong but rather the bears were taking a break. One final feather in the bear’s cap is the fact price has formed a bearish rising wedge (blue dashed lines).  Because it has yet to confirm with a breakdown below the lower support channel line, it allows for the possibility of one more move higher before any break occurs (forming triple divergence).

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My read is the bulls and bears are locked in an epic battle. With an eye on the longer view a slight edge must be given to the bulls. On the shorter term, the bears are out in the lead.  Add to this mixed message the fact we are in the throes of a dull seasonality period (June-August) which will likely keep any move (higher or lower) in check as most market movers are on vacation. So with no clear winner, patience is needed as there is not enough evidence on our longer term investing time frames to commit to either the bullish or bearish case.