Since May we have seen the US stock market averages and the S&P 500 ETF Trust (NYSEARCA: SPY) rally along with the DOW and the Nasdaq in what has been a very narrow rally in terms of the number of stocks helping the market go up. That rally hit a danger spot last month as a lot of the leadership stocks such as Facebook (NASDAQ: FB) blew up on earnings and broke down in a tear drop stop drop. Now on the hourly technical analysis charts several indicators are warning that an immediate end to the rally may now be at hand.
Take a look at this hourly chart. The big thing that has happened in the past two weeks is that the volatility in the US financial markets has completed vanished. This caused the volatility index, known as the VIX, to fall below $11, but more importantly has caused the 20-day and the 20-hourly Bollinger Bands to narrow. In fact the hourly Bollinger Band width indicator has fallen to the lowest point it has been at all year. It’s the BB Width indicator below the candlestick plot on this chart.
What the Bollinger Bands do is measure real price volatility. When prices barely move the bands get closer together. This is important because when they get close like this they eventually start to expand, which means they serve to signal a prelude to a big price move.
Low VIX readings also eventually lead to high VIX readings and the VIX tends to rise as the stock market declines. A way to put all of this is that the stock market has barely moved in the past few days and these indicators suggest that a short-term sizable move is likely to occur. The problem is that if it’s to the downside it will tell us that the market rally that began in May has stalled out and we’ll have to look for the next key moment to be a test of long-term support at the 150 and 200-day moving averages.
Short-term support on the S&P 500 is at 2850. If the warning sign the hourly indicators are flashing triggers then the S&P 500 will close below that level within the next few trading sessions. If that happens look for a retest of support at the 200-day moving average of the S&P 500 around 2,710 within a few weeks, probably in September, for what will be a moment of truth for the US stock market.
Many markets are already trading below their 200-day moving averages and are in stage four bear markets of their own. And what is worrisome is that many popular fad stocks that had once been leaders are now rolling over. Facebook is just the biggest example and it has had a small bounce this week that looks like it stalled out yesterday after hitting price resistance on the hourly chart.
I took note of the low volatility in the stock market last Thursday and now it looks like we are getting close to the moment it is going to change. I know we are gapping down in the markets today and people want buys, but I think this is the time to be cautious and patient. This is time to be careful in the markets and to buckle up your seat belt!
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