A week ago we promised you a rambunctious week in the S&P 500 (SPX) and we got it: The Dow made new highs on four days in a row, and the S&P 500 cash index (SPX), after bumping around the old high most of the week, broke out to a new high Friday morning.
This was pretty typical of triple witching week, when options on futures, stocks and the futures contracts expire simultaneously. Triple witching week has ended positive 15 of the last 19 times.
But now all the special events that drove prices last week – the FOMC policy statement, the VIX future options, the triple witching, the Alibaba IPO and the Scottish referendum – are behind us. What happens next?
Will The New Highs Hold?
The breakout from the V-shape pattern we mentioned last week was confirmed by last week’s move (see chart). But the failure to hold the new high on Friday suggests that the market is stalling around this point.
We’re waiting to see a bullish confirmation of the new high, and some kind of follow-through. The intermediate-term upside targets are around 2033, but we may not get there this week.
If we don’t see confirmation of the new high we are likely to have a short-term pullback to around 1990, or perhaps lower.
There is solid support below that level at 1975-76 (the 50-day moving average and the 38% Fib retracement from 2019 high-1968 low) so we are not expecting the market to break decisively. But it will probably be a choppy week with 1990-2000 the main battleground.
An Army Without Soldiers
But what is worrisome is the failure of the broader market to follow the big-cap leaders. The Dow and the S&P500 are charging higher, but they are looking a little lonely.
The Russell 2000 index – the small-cap index – has gone sideways for almost nine months. It made a double top at 1213.18 in June but since then has been unable to move above 1187.50. The current market is looking like an army with lots of generals, but no soldiers. If the Russell 2000 doesn’t start to catch up to the SPX – and that can only happen if the SPX slows down – we should expect some kind of correction.
And we should note another milepost that was passed this month. The SPX has now tripled its value from the low it made at 666.79 in March 2009, which proves decisively that the best trading strategy for the past 65 months has been … buy and hold: buy the index and hold on to it
We doubt that will be the best strategy for the next 65 months.
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SPX Sept. 19, 2014
