Looking Past the Summer Doldrums (by Drew)

Hello Slopers, Drew here from PT. Its been a while but I am glad to be back with a new issue of the Weekly Market Digest. With August in the books, investors can look forward to the end of what has been a lackluster summer.

The S&P 500 is virtually unchanged over the last four months.

No surprise here though, as this is typically the slowest time of year for the markets. Although prices fell 4.7% for the month of August, the long-term trend appears unaffected. Prices continue to churn within a distinct 150 point trading range on the S&P 500. We have floor near 1000, and an 1150 ceiling.

As long as we remain within this range, the long-term market outlook is neutral. The 12-month MA line has turned lower, and currently sits near the middle of the trading range (1075).

 

 

Key ranges have been highlighted on all of the weekly market indices that we track. This range is bounded by the most significant support and resistance levels that investors should be watching.

As I mentioned before, the markets have been stuck in a trading range for the entire summer (and then some). Navigating a trend-less market can be difficult. One of the biggest problems associated with a sideways market is an unusually diverse and complex arrangement of technical patterns. How do we know which patterns to follow when faced with a variety of conflicting signals on multiple time frames?

There is no easy answer to this question. An experienced speculator will be constantly reassessing the state of the markets with an open mind, and a sound sense of perspective.

Larger patterns that form over a longer time frame will typically supersede a relatively smaller pattern. Other patterns simply dissolve away into a continuation of the underlying trading range. Eventually though, there is a valid signal and prices begin a new trend. This is why we must continuously stay alert, and carefully watch the tape.

I have discussed many times how prices appear to be forming a long-term Head and Shoulders reversal pattern on the indices. However, we also have a potential symmetrical triangle in the making (orange), and a smaller Head and Shoulders bottom. Clearly there is a great deal of noise right now in the markets.

Our outlook is simple. Avoid the confusion by focusing on the largest patterns, and the trading range. Look for a confluence of patterns to resolve when the market finally does make a decisive move. For example, the larger Head and Shoulders reversal pattern would likely be violated if the smaller Head and Shoulders pattern resolved and broke above the neckline (clearing the left shoulder of the larger Head and Shoulders reversal).

 

 

Dow Theory charts have been updated with the potential symmetrical triangle. We will continue to keep a close watch on the most recent key intermediate low (blue), and will update accordingly as this rally progresses off of the late August trough.

 

 

The next intermediate-term time cycle high is approaching, and should arrive near the middle of September. For now, prices are currently trading above the level of the prior intermediate-term cycle low.

 

The Dollar Index fell 1%, as equity prices moved higher for the week. Prices closed slightly above 82, and within a few cents of the 40-week moving average line. Although prices have declined sharply over the last eight months, the 10/40 week EMA crossover system remains on a buy signal.

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