There has been much debate by the talking heads about whether the current bull-run in equities is coming to an end. Rather than debating the Fed’s potential “tapering” or other events, I choose to focus on what really matters, the charts.
The S&P 500 Weekly chart has been retreating from all time highs. Since we did not have supply overhead until out most recent drop, I am not willing to short until I see a defined downtrend and a retest of a supply zone. A break of the low 1600 demand zone could also trigger some panic.
The 2007-2008 market crash was preceded by a drop in the Russell 2000 index. I am also watching this index for signs of weakness. The daily chart has broken from a head and shoulders and may be headed toward the demand at 956.
If the daily demand doesn’t hold, the 938 weekly demand zone is old and tested and may only offer a small bounce to make a lower high before breaking to the 850 area.
In my article from a couple of weeks ago, I suggested that without the supply zones to tell us the top, we may have to rely on some related securities hitting demand to signal reversals. I am closely watching the weekly supply zone on the 10 year note. If prices of the note hold the demand zone and rates hold supply, then the equity markets may weaken.
So there is a lot to watch for the next few weeks in the markets. For investors and longer term traders, this indecision is a time to be cautious. Wait to enter in either direction until you have clarity. Deciding not to trade is a trading decision and may be the best way to protect your capital until you have more certainty in the markets.