A rally built on thinning volumes and fading trend momentum, especially in growth stocks, has met resistance near all-time highs and resumed the downtrend that began mid-July. Our proprietary technical signals that exited long positions mid-July, are once again suggesting exiting long positions (or buying hedges) for this could be one long ride...down.
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SettingĀ up for A Major Move - The trend fade is best captured by the ADX indicator sitting below 25. Given the confluence of the DMI indicator set, the index appears to be setting up for a major move, which we expect to be resolved down rather than up.
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Where can the index find support - 5100-5300 - in the early August downdraft, a neat 38.2% retracement (to 5110) halted the trend and for now that is still viewed as the major support. Previous highs in the 5350 area will provide initial support.
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Where does the "take profit" turn to "shorts" - Index is sitting at critical moving averages, break below which converts the "take profits" signal to outright "shorts".
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Where Will We be Wrong - Should the index reverse up and take out the previous all-time high (5670 on the cash index and 5721 on the futures), the downtrend argument will be substantially weakened.
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How to Position - While the price action on 3rd Sep has pushed volatility higher, making hedges more expensive, a VIX at 20.7 is still relatively low and we still see merit in dynamically hedging equity portfolios. Marginal positions should be actively reduced/ hedged given elevated risks. While we recognize the possibility of a reversal up, we would rather await a confirmation even if that means missing the initial move.
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S&PĀ Futures -Ā DailyĀ Chart withĀ DMIĀ Indicatorā
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