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What’s inside:

  • S&P 500 continues to rise, buying not appealing but neither is shorting
  • Top-side channel line might provide support again on a pullback
  • Volatility likely to rise in meaningful way, just not today and not likely tomorrow either

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In the first couple of days to start the year, we noted that the S&P 500 was extended but that momentum wasn’t worth fighting. At the time, the market was at the upper end of the channel starting back at the beginning of December, a channel which it has been exceeded in recent sessions, and even as late as Wednesday tested as support.

The view hasn’t changed, the market is extended and while it may be tempting for some to short it because it’s ‘too high to buy’ or simply overbought, ‘up here’ can become ‘down there’ quickly in as strong of a market as the current one. Initiating fresh longs doesn’t hold much appeal, but shorting holds even less. There will be a time for shorts, just not yet.

What is a trader to do? Another dip back to the upper parallel may offer traders a level of support to lean on, but the time for a meaningful decline may also be nearing. Keep an eye on price action on any decline which unfolds. Not all declines are created equal. Those with momentum want to be sidestepped until momentum subsides and reverses, while dips (corrections) which are shallow and lacking any meaningful power are viewed as more favorable for entry.

As we’ve discussed on a couple of occasions, most recently at the very end of last year, volatility looks poised to rise at some juncture, and likely in a meaningful and sustainable way. You can check out detailed commentary on the subject in the Top Trading Opportunities in 2018 under “Resurgence of Volatility, S&P 500 Runs into Trouble”. But until we see cracks in the lining, we’ll have to continue trading in the market environment we are currently being dealt.

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S&P 500: Daily

S&P 500 daily price chart

---Written by Paul Robinson, Market Analyst

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