It's been a few weeks since I've posted an outlook for the overall market and the major indices in particular. To be exact, my last update was on July 17. However, I hadn't really seen any major cause to pen an update -- until now. So far, the market has been following through nicely with my prior expectations. The lift from our Fed chief's testimony -- or the "Bernanke Boost" -- drove S&P 500 to a slighter higher new high on the year. Overall market action has become choppier ever since, with greater overlap in prices from one session to the next.
At this point, though, the indices are once again striking resistance. The S&P 500 -- shown above via the SPDR S&P 500 (SPY) -- recently tested the 100% expansion level, based on the rally from April and May. That move saw the index hit the next target level I had been monitoring, which I'd cited in my last column as a potential start to a larger correction on the weekly or monthly time frame. Furthermore, both the Russell 2000 and the Nasdaq have joined the SPY in testing this key resistance zone. See the iShares Russell 2000 Index (IWM) and PowerShares QQQ (QQQ) charts below.
So far this week, we have seen the start of the initial reactions off these levels. We have an intraday reversal strategy under way on the 90-minute time frame in these major indices, and I call that strategy a "2T." Just think of it as a double-top pattern in which the second high is slightly higher than the first. It's a type of bull trap, luring in buyers with the false hope of another bull run as the prior highs break. In the meantime, it also flushes out the eager bears who had entered on the first correction and had placed their stops above those prior highs.
We're seeing light volume on the breakout, which confirms the lack of truly committed market participation at those levels. Instead, the appearance is that most are currently keeping a wary eye on the market.
At this juncture I'm on the side of the bears, but I also remain a bit wary. Despite the overhead resistance that has drawn the bears back into the game, the pace of the most recent upswing is still quite strong on the daily and 90-minute time frames. This leaves the door open for a second bull trap, with yet another slightly higher high. This isn't impossible, given the momentum, though I do still feel it's unlikely. Still, we're in the middle of earnings season, so I'm not going to rule it out.
On the 15-minute to 90-minute time frames, the bears firmly have the upper hand. Today I'm monitoring both the 15-minute and 30-minute charts for intraday continuation strategies to the downside. As we head into Wednesday's session, the Russell 2000, S&P 500, and Nasdaq Composite are all forming low-level congestion following the selloff earlier this week.
At the time of publication, Hansen had no positions in the securities mentioned.