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Weekly Market Outlook – New Highs Dead Ahead, If the Bulls Have the Guts

Weekly Market Outlook – October 27th 2019

The indices are rolling along, but they’re almost out of room to run.

That’s the short version of a long story. Here’s the long, full-blown version.

Investors were stoked on Friday, sending the S&P 500 up a healthy 0.41%. That translates into a 1.2% gain for the week. However, Friday’s high of 3027.39 is curiously aligned with the peak prices from September as well as July. Traders may have drawn a mental line in the sand there.

S&P 500 Daily Chart, with VIX, Volume

Source: TradeStation

That doesn’t inherently mean the rally has to come to a close here. It’s one possibility, but one of several. It’s also possible the bulls are biding their time and waiting for an opportune time to break out. The string of higher lows since June’s low is good evidence that the bulls have been gearing up for such a move. Eclipsing 3027.6 is the key though. None of the potential rally matters until that level is hurdled, and with the VIX as low as it is, that’s not going to be easy.

Also notice that while the undertow is respectably bullish, there’s not a great deal of volume behind it.

The weekly chart of the S&P 500 puts things in perspective, for better or worse. From this perspective, there’s a slight hint of a rising, converging wedge pattern framed in white and blue dashed lines. That’s another clue of a slow, bullish buildup.

S&P 500 Weekly Chart, with VIX, Volume

Source: TradeStation

There’s a second, in-between possibility on the table. The S&P 500 could push past the technical ceiling at 3027, but only to test the upper boundary of the converging wedge shape currently at 3052 (and rising). That would be just enough time and room for the VIX to slide all the way back to its absolute floor around 11.5. Then the market could roll over again, repeating a pretty well established pattern.

The good news is, there’s some pretty dependable technical support waiting for the S&P 500 around 2900. That’s where the green 200-day moving average line awaits, paired with the floor that connects all the key slows since August.

Here’s the problem with all three possibilities (a pullback, a breakout, and a little more bullishness before a pullback): The calendar says we should have already made a clear pullback and started the usual year-end- bullishness. We never started with the advantage of September/October weakness.

S&P 500 Average Annual Day-by-Day Performance

Source: TradeNavigator

Here’s the problem with that problem — things are a little bit different in the third year of a presidential term, as the next election starts to take shape. In these years, the market remains weak through mid-November and then starts to rally… not that we’re following this usual path either.

S&P 500 Average Presidential Term Day-by-Day Performance

Source: TradeNavigator

Maybe it doesn’t matter at all. Investors are pretty well primed to ignore any historical precedent, and for that matter, ignore the unusual bullishness we’ve seen since the end of last year. That can be powerful in and of itself.

Unfortunately, we can only wait and see how all of this pans out.

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