As you may have noticed, the past few days seem to have increased in volatility. With that, a lot of the students that I coach have wondered what the near-term direction of the market is. It seems that we either go up nicely only to have the gains erased, or we go down hard only to fight our way back into the green. So, which is it: up or down? How might one gauge the short-term direction of the market?
As you may have noticed in my other Chart School articles, as often as possible I like to keep things simple. Below is my very simple, straightforward answer to the above question:
As you can see, I have added the 200-day simple moving average (SMA) to the S&P 500, as well as its current trend line support (blue). As commonly happens, the S&P is reacting to its 200-day SMA as a resistance area on each rally we’ve had over the last few months. In the meantime, the S&P has created the up-trending support, which we have tested a couple times as of late. At some point one of these levels will have to give.
The Tale of the Tape: The S&P is stuck between its up-trending support and its 200-day SMA, which is currently at 1114. A break of either of these levels should dictate the near term direction of the market. A break above the 200-day SMA would be a great point at which to enter new long positions or add to current ones. On the other hand, if the support we’re to break, short positions might be entered.
Waiting for the most opportune trading times, like I have outlined above, could provide you with the higher probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT