Correction Risk Increases

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The short trading week during our Independence Holiday was also a flat week for the S&P 500. It ended up finishing the week up .07% after Friday’s close. The bears controlled price on Thursday and they had a really good chance to pull the rug out from underneath the bulls as the bears closed the S&P 500 lower than they have in over a month, but they could not. The bulls fought hard on Friday and were able to retrace the damage the bears did on Thursday.

The S&P 500 is within a bear channel inside the trading range of the 2400 and 2450 level. The S&P 500 has weakened over the past several weeks compared to the start of the channel which is evident by the number of bearish bars vs. the beginning of the sideways channel. We are over 20 trading days into the current flat lining S&P 500 which takes away the conviction of the bulls or the bears that it will break in their direction. The good news for the bulls is that we are at the bottom of the range and they were able to pull off a bullish day on Friday giving a buy signal. Monday is a big day for the bulls as they have not been able to put together a string of wins since May and Monday would be their second day in a row if they can pull it off.

Breadth again this week panned out to be neutral. The longer-term oscillator is trending weaker than it was last time we were in a trading range, but is at the bottom of the current range suggesting at least a couple days of upward movement. The shorter-term oscillator also turned positive by the end of the week from the bottom of its range bound movement. Overall, the short-term outlook for price according to breadth is positive. As far as the economic data this week, the Producer Price Index and Consumer Price Index numbers are scheduled for release this week. Both are expected to be flat or modestly higher.

The longer-term trend of the S&P 500 is still up, while the shorter-term is still range bound. The bulls have a chance on Monday to continue their bullish breakout started Friday. If the S&P 500 breaks in either direction, we will want to see a strong move in breadth to show conviction, or a general consensus, of the majority of stocks. This would show that the breakout of the current action has the legs to start a trend. Should be an interesting week!

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