Tuesday, January 27, 2015

Looking At Trends

Wanted to offer a quick update on the longer term charts of the S&P 500 and Russell 2000 (IWM) for some perspective and potential scenarios.  

Both index's remain in long term uptrends from the 2009 bottom steadily rising between the top and bottom channel lines.  We are just looking at price charts in these examples.  The S&P 500 weekly chart has the look of a rising wedge.  A break above or below the channel lines could bring about a quick move in either direction.  Also be on the lookout for a false breakout in either direction similar to the October bottom in which we initially broke below the lower channel line.  Sellers fearing a bigger correction sold positions or got short only to be fooled once again and we raced right back up to the upper channel line.  These two boundaries are getting squeezed closer by the day and ultimately the index must resolve this.  Recently we've seen continued back and forth choppy action where weakness has been bought and strength sold.  This is characteristic of the QE influenced market of the last several years and with the ECB's announcement last week, we could be in for more.

Turning to the Russell 2000, we see that the index has essentially gone sideways for the last year.  This has created a nice long consolidation pattern that should eventually result in a sustained directional trend.  A breakout to the upside of the sideways pattern would give the index plenty of room to run until technical resistance at the upper channel line.

As for what news headlines will "cause" the indexes to break out of these ranges is anyone's guess.  With earnings on the horizon many individual stocks will be on the move while continued QE by central banks surely makes it hard to argue against the established uptrends.  Yet a black swan / unforseen geopolitical event is enough to derail any market.  As we wait for the next market moving headline, it's important to know where things stand in terms of trends and support/resistance levels and manage your risk models accordingly.  With the market firmly in a choppy range and futures pointing to a big gap down this morning, we'll be watching how the indexes react around these levels.  

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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