Looking for a Trend
After a sharp downward move that began in April, for the past month major indices have been vacillating up and down. Stocks began an upward track after the first week of June, but the past couple of sessions have seen them falter.
Below is a chart of the S&P 500 Index. I’ve added two lines to help illustrate the current situation. The red line highlights an area of strong support—at about the 1050 level. Three times in the past six months this index has fallen to this area and each time has been unable to penetrate lower. Just a couple of weeks ago it appeared almost certain that this support would not hold. Stocks were falling and economic reports were gloomy. But stocks rallied back.
The red line is about the level where I anticipate the S&P 500 will find resistance. Unless the S&P 500 can break strongly above this level, there seems to be little point in taking new long positions.
The middle portion of the chart is a relative strength index (RSI). The RSI needs to trend above 50 if the index is going to have enough momentum to sustain an advance. It is currently hovering right at that level.
The bottom portion is a moving average convergence divergence (MACD). It began moving upward in early June, but had not yet climbed into positive territory. Until it breaks that barrier and holds above zero, any positive moves by the index must be viewed with suspicion.
Summer is traditionally a weak season for the stock market. Of course 2009 proved to be an exception. I don’t profess to know what direction stocks are headed when they break out of this sideways move. But given current weak economic fundamentals, it would not surprise me to see stocks move generally sideways for the next several months.
One other seasonal factor that can increase the volatility of market moves is declines in trading volume. Summer means vacations, so trading volume often falls with people away from the markets. As a result market movements can become exaggerated if economic news causes investors to feel a need to move in or out.
For now the best course of action for investors is to maintain a close watch on market movements and wait for indicators to signal that a new trend is developing.
F.S.