It’s A Breakout…
Early Wednesday morning I penned a “Quick Take” discussing the breakout of the two-month long consolidation process. To wit:
“The bulls are ‘attempting a jailbreak’ of the ‘compression’ that has pressured markets over the last two months.
This breakout will provide a reasonable short-term trading opportunity for portfolios as I still think the most probable paths for the market currently are the #3a or #3b pathways shown above.
If we get a confirmed break out of this ‘compression range’ we have been in, we will likely add some equity risk exposure to portfolios from a ‘trading’ perspective. That means each position will carry both a very tight ‘stop price’ where it will be sold if we are wrong as well as a “profit taking” objective if we are right.”
On Thursday, that “jailbreak” occurred with a move above resistance and the previous closing high downtrend.
From a bullish perspective there are several points to consider:
The short-term “sell signal” was quickly reversed with the breakout of the consolidation range.
The break above the cluster of resistance (75 and 100-dma and closing high downtrend line) clears the way for an advance back to initial resistance at 2780.
On an intermediate-term basis the “price compression” gives the market enough energy for a further advance.
With the market close on Friday, we do indeed have a confirmed breakout of the recent consolidation process.Therefore, as stated previously, we reallocated some of our cash back into the equity side of our portfolios.
From a bearish perspective the are also several points to consider:
The volume and breadth of the market rally has been “okay” but not stellar, which suggests this was more of a forced “short-covering” rally than a turn in overall conviction.
The rally, as Doug Kass notes below, was led by a surge in energy prices due to the Iran escalation over the nuclear agreement.
With everyone seemingly short the U.S. dollar, short Treasury bonds and long oil prices, a reversal of that excess positioning seems likely from a contrarian point of view. Such would definitely pressure stock prices lower.
Complacency has once again returned to the market very quickly following such a long consolidation process as noted in the chart below, not only is there a breakout in stocks but also volatility.
As I noted in last Tuesday’s update:
“Despite the recent corrective process, investors still remain primarily allocated to equities as shown by the Rydex allocation measures below. With the market testing its longer-term bullish trendline from the 2016 lows, Rydex Bear and Cash allocations remain at...