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Energy is building for an immediate 5% move in the stock market.
Volatility has been contracting for the past three weeks. Yes, we’re still seeing some wild swings in stock prices… But they are less and less wild than they were a few weeks ago.
Take a look at this 60-minute chart of the S&P 500, and you’ll notice a recent pattern of lower highs and higher lows – which is typically what happens when volatility contracts…
In other words, the S&P 500 is on the verge of a fast, 60-point move. The obvious question is… which way?
My bet is to the downside – but it’s a small bet.
Several of the intermediate technical tools I use (like the NYSE Summation Index) have rolled over and are flashing “sell” signals. That’s why on Tuesday, I suggested traders who have enjoyed this tremendous, six-week, 18% pop higher take profits now.
There are, however, lots of smart folks who are arguing the market will blast even higher from here.
The fact is, consolidating triangles usually break out in the direction in which they were originally formed. In other words… since stocks were rallying when the S&P fell into this pattern, the odds favor a breakout to the upside. So it’s easy to see why some folks are bullish.
On the bearish side, you have Jason Goepfert – America’s leading expert on stock market sentiment – over at SentimenTrader. He says there’s only been four other times in the history of the stock market when this pattern has formed after such a strong rally coming off a 52-week low. And the first break is usually a false one.
That means… whether this pattern breaks up or down, it’s likely to be a fake-out. Traders will get suckered into positions. And then, the market will reverse and go the other way.
You’re not alone.
There are plenty of reasons to justify both bullish and bearish arguments at this point. And there are lots of smart folks on both sides of those arguments.
So what do you do?
For starters… if you’re a trader and you’ve been onboard the market rally since we predicted it in early October (see here and here), you must take some profits here. Stocks have hit my price targets for a year-end rally. If you bought then, you’ve made 18% in six weeks. That is just as impressive as maybe capturing 23% in seven weeks. And if you take the gain now, you won’t risk losing any of it if the market does fall from here.
If you didn’t buy into the market back in early October – when the S&P 500 was trading at 1,100 and when there was plenty more upside potential than downside risk – you, as a trader, can’t possibly get bullish right here. The market can break either way. It’s a 50-50 proposition. You’d be risking a 5% move against you just to make 5%.
That’s not a good trade.
It’s probably best to just sit this one out and wait for a safer entry point. If you skipped my October advice, you’ve already missed out on an 18% move. Missing another 5% move higher won’t kill you.
But losing 5%, after already missing out on 18%, well… that would be painful.
Best regards and good trading,
– Jeff ClarkSource: Growth Stock Wire