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S&P 500: Running Out of Steam

S&P 500: Running Out of Steam

Paul Robinson,

What’s inside:

  • The S&P 500 continues to grind
  • Short-term triangle break
  • Divergence in percentage of stocks above 10-day MA and the S&P suggests it will be difficult to keep pushing higher without a decline, even if small

The S&P 500 continues to grind its way higher, an outcome which is not uncommon following large bursts higher, especially to record highs. Yesterday, we pointed out a possible bull-flag on the hourly time-frame should we see more short-term backing-and-filling, but what actually came to develop was a symmetrical triangle. In overnight futures trade, the S&P pushed above the top-side trend-line of the triangle and moved towards the 7/14 peak at 2174.

The thinking on this end, is that if the market can push above the 2174 high it will soon struggle again to continue its momentum (Triangle points to a possible move to low 2080s on a breakout.) If the market fails to push above, we could see a short-term double-top develop.

On 7/8, 96% of stocks in the S&P 500 were trading above the 10-day moving average; indicative of just how powerful of a move we actually experienced in such a short period of time. But nevertheless a very overbought reading. During the last seven trading sessions it has been rolling over while the market continued higher, and as of yesterday 71% of stocks were trading above the 10-day MA. A decline in the percentage is expected, but the persistent fashion in which it is rolling over now suggests enough divergence between the overall index and its constituents is present to make difficulty in keeping any short-term gains without retracing at least a little bit. The market is running out of steam.

We discussed recently on a few occasions the propensity for new record highs in recent years to fail back below the prior high (in this case, 2137) within days to a few short weeks. We expect this time will be no different, but the timing could be tricky.

Picking tops is a difficult endeavor, and with that said, establishing shorts in this environment is difficult without first seeing some real selling pressure indicate a turn is in. However, buying isn’t much easier given the slow grinding nature of the advance at this point. Keeping trade duratioins short and maintaining a very nimble approach will serve traders best.

Struggling to make good on your trading ideas? Check out our trading guide, “Traits of Successful Traders”.

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.