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.
Setting 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.
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.
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".
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.
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.
S&P Futures - Daily Chart with DMI Indicator
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