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Weekly Market Outlook – Don’t Load Up On New Bullish Trades Just Yet

Weekly Market Outlook – September 8th, 2019

The good news: Last week, the market’s key indices pushed past the technical resistance they struggled to clear the week before. The bad news: The move didn’t take shape in the most compelling fashion. As was noted, a couple of different gaps were left behind that may now be pressured to be filled in. That bearish pressure could readily turn into a full-blown downtrend.

S&P 500 Daily Chart, with VIX, Volume

Source: TradeStation

That’s the problem when investors get a little too excited too quickly about headlines and fail to pace themselves. The euphoria can fade just as quickly as it forms. And, the fact of the matter is, the economy is still as much of a question mark now as it was a week ago, even though a week ago investors didn’t feel like there was any clarity on the matter. Perception is everything.

As always, backing out to the weekly chart puts things in perspective. From this view we can see that while last week’s advance was a nice follow-through on the previous week’s rebound, there’s only a little more room to continue rallying before a well-established technical ceiling is re-encountered … the line that connects all the key highs going back to the beginning of 2018.

S&P 500 Weekly Chart, with VIX, Volume

Source: TradeStation

The whole scenario is a problematic one, however, for several reasons.

If the index manages to keep building on that momentum and blast past that resistance level, it could keep going. Although not quite a textbook-caliber example, the action since early last year constitutes an upside-down head-and-shoulders pattern that often catapults the chart well above the neckline.

S&P 500 Weekly Chart, with Head and Shoulders Pattern

Source: TradeStation

If the bulls play their cards right and pace themselves between here and there, the S&P 500 could be at the make-or-break line in the sand right around the time the usual September (and early October) weakness comes to a close and leads into the usual fourth quarter rally.

That’s still problematic this time around though.

Incredibly enough, as rocky as things have been this year, the S&P 500’s path is still ahead of schedule, so to speak. That is to say, in the average year the index would be up 4.6%. So far for 2019 though, the S&P 500 is up 18.8%.

S&P 500 YTD Performance vs. Norm

Source: TradeNavigator

Except, maybe that concern is unmerited.

While this year’s gain has been impressive, it would be naive to not acknowledge the bulk of the big move was spurred by a stunningly big setback during the fourth quarter of last year. On balance, we’re not too far off-track when looking beyond the oddity that is 2019. In fact, in just looking at the way the market behaves over the course of a typical four-year presidential cycle, the S&P 500 is ahead of its usual pace, but it’s not out of character for a bullish four-year span. It’s right on track, in fact.

S&P 500 Performance vs. Norm During Four-Year Presidential Term

Source: TradeNavigator

Even this is challenging though. Though each year of a four-year term behaves similarly to the other three, for whatever reason, the third year’s usual fall lull tends to last through November… even when the undertow is bullish.

This prospect clearly calls into question the potential of a breakout from a head-and-shoulders setup. Indeed, assume nothing here. This dance is very much a day-by-day affair.

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