Technically Speaking: “Fuhgettaboutit”

“Technically Speaking” is a regular Tuesday commentary updating current market trends and highlighting shorter-term investment strategies, risks, and potential opportunities. Please send any comments or questions directly to me viaEmail, Facebook or Twitter.

In last week’s post, I did a complete sector and major market review. Not much has changed in the past week given the very quiet activity that has persisted. This lack of volatility, while not unprecedented, is extremely long in duration as noted in past weekend’s newsletter, “An Unexpected Outcome:” 

“Speaking of low volatility, the market has now gone 108-trading days without a drop of 1% for both the Dow and the S&P 500. This is the longest stretch since September of 1993 for the Dow and December of 1995 for the S&P 500.”

The issue becomes, of course, which way the market breaks when volatility returns to the market. Over the course of the last three years, in particular, those breaks have been to the downside as shown below.

Given the particularly extreme overbought condition that currently exists, the strongest odds suggest the next pickup in volatility will be in the form of a corrective action to reverse some of that condition. As I detailed on Saturday:

“As noted in the chart below, the market is very close to a short-term ‘sell signal,’ lower part of the chart, from a very high level. Sell signals instigated from high levels tend to lead to more substantive corrective actions over the short-term. I have denoted the potential Fibonacci retracement levels which suggest a pullback levels of 2267, 2230, and 2193. To put this into ‘percent terms,’ such corrections would equate to a decline of -4.7%, -6.2% or -7.8% from Friday’s close.”

“To garner a 10% decline, stocks would currently have to fall 237.8 points on the S&P 500 to 2140.20.  Given there is little technical support at that level, the market would likely seek the next most viable support levels at the pre-election lows of 2075 or a decline of -12.7%.

Such a decline, of course, would not only wipe out the entirety of the ‘Trump Bump,’ but would also ‘feel’ much worse than it actually is given the exceedingly long period of an extremely low volatility environment.”