Tuesday, August 4, 2015
It's the dog days of summer.
These are supposed to be the lazy days of the stock market. Low volume, tight trading ranges, and not much action.
Most of the big-money traders go on vacation in August. They tell their staffs not to screw anything up and head off to their summer homes in the Hamptons or their secluded hideaways in the Cayman Islands.
With the underlings in charge, you would think we'd see slow, boring price moves in the market in August.
You'd be wrong...
Looking at the past four years alone, August has been volatile. The S&P 500 gained ground in 2012 and 2014 – earning 2.2% and 4.2%, respectively. The index lost ground in 2011 and 2013 – dropping 4% and 4.1%, respectively.
Those are large monthly moves. And by the look of things, this August may be volatile as well.
Take a look at this chart of the S&P 500...
All of the short-term moving average lines – the nine-day exponential moving average (EMA), 20-day EMA, and 50-day moving average (DMA) – are coiled together around the 2,100 level, which is around the current price of the index.
Energy is building for the next big move. We could see a 2% to 4% move in the S&P 500 over the next few weeks.
But I'm not going to trade it.
You see, there's no clear direction. Most of the technical indicators – like the McClellan Oscillator and the Summation Indexes – are in neutral condition. There's no clear edge to either side.
While I know there's a big move coming, I can't make a trade without an edge in one direction.
I know hearing this might be hard for some of you...
Last Friday, I spoke with a longtime trader friend of mine who is dying to put money to work. He wanted to know my thoughts on the market. I told him the same thing I just told you. I'm not anxious to trade aggressively on either side at the moment.
He responded by asking, "Look, if I put a gun to your head and told you to pick a direction, what would you say?"
"Just shoot me now," I said. "There's no way I'm going to risk my children's inheritance on a low-probability trade."
Sometimes we forget that there are times when it makes sense to sit on the sidelines and hold onto our cash. We don't have to trade every move and be involved every day. If the market makes a big move without us on board, that's OK. There will be plenty of big moves in the future.
Good traders are willing to wait patiently for a clear setup in which the reward far outweighs the risk. Folks who have to take a position no matter the setup, just to be involved in the action, aren't traders. They're gamblers.
With all of the moving averages coiled together, and with the S&P 500 confined to a relatively tight trading range for the past two sessions, the market is on the verge of a big move. But with all the technical indicators in neutral territory, there isn't an edge to either direction. So the risk/reward of any trade here is 50/50 at best.
Gamblers might make a bet under these conditions. Good traders won't.
Best regards and good trading,
While there's no clear direction for the market over the next few weeks, the technical indicators are warning that the bull market is nearing an end. Jeff expects the S&P 500 to decline toward the 1,990 level between now and October. Get all the details here.
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