Why The Market Will Be Locked In A Sideways Trend (For Now)

Amber Hestla's picture

Tuesday, June 25, 2019 - 2:30pm

by Amber Hestla

We definitely experienced volatility last week. I had spotted a signal to expect volatility, and we met that target in just a week. 

The S&P 500 gained more than 2% for the week. That's a significant move, but looking ahead, it's time to consider what will create the next big price trend in the stock market. 

The weekly chart below shows why we will see a significant trend. This is the fourth time since January 2018 that the S&P 500 has challenged the 2,900 level. 

S&P trend level

A significant trend followed the previous three times we reached this level. In fact, prices pulled back quickly after each of the previous attempts to break through 2,900. That could be important information when considering what could happen next. 

When looking at a chart, it's important to remember that someone bought and sold at each point of the chart. So, some investors bought at the highs in January 2018 and saw the stock market sell off almost immediately. 

Let me explain why that's important to remember. 

Another Lesson The Army Taught Me About Trading
As some of you may know, I served in the Army. During my time in the Middle East, I noticed attendance at religious services increased over time. Sometimes, there was a surge in attendance. Surges seemed to follow especially exciting missions. 

I knew I was seeing the reality of a statement made during World War II that "there are no atheists in foxholes." 

My theory is that religious activity also increases in market selloffs. By that, I mean some of the investors who bought near tops turn to prayer after a decline, often something like, "Just let me get even on this position. I'll sell and never speculate again." 

This shows up on the chart as resistance. At the price level labeled "2" on the chart, investors who bought at "1" were even. They sold, and buyers at level "2" turned to religion during the subsequent selloff. 

The same pattern repeated at the point labeled "3" in the chart. 

That brings us to number "4," the level where we ended last week. 

From here, we are almost certain to see a significant trend. Our goal is to understand the direction of the trend. 

Where's The Market Headed? Sideways
Remember, trends can move up, down or sideways. Charles Dow's work from the late 1800s highlights the importance of the sideways trends that can replace a downtrend. More recent work indicates prices move in a sideways trend more than half the time. 

In my opinion, a sideways trend is the most likely course for the stock market right here. This won't be a dull sideways trend. I think for the short term, we will see prices move within a relatively narrow range, about 3% above or below the current level. This will lead to large and tradable moves in many stocks. 

The probability of a significant uptrend is low because many investors are selling near their breakeven level. They are troubled by the weak fundamentals, the possibility of a trade war, and the news from Iran. 

A significant downtrend seems unlikely because there are buyers whenever a selloff occurs. I've covered this several times, but there are trillions of dollars in money market accounts. That money on the sidelines explains why selloffs are relatively brief. Investors are buying the dips. 

You might know some investors that are acting like this. They want to be bearish, but they buy when they realize there's really no alternative to the stock market. 

My outlook is confirmed by the fact that Profit Amplifier Momentum (PAM), the indicator at the bottom of the chart below, failed to make a new high last week. 

PAM chart

​In strong uptrends, PAM confirms the price action by making new highs. Until that happens, the weight of the evidence favors a sideways trend. 

Action To Take
The sideways trend won't last too long, in my opinion. Earnings season will dominate headlines starting around July 15 when some large financial companies report. This week, we get a preview of earnings season as FedEx, Nike, and Micron Technology report. 

FedEx offers insight into transportation. If the economy is slowing, we could see the company miss expectations as orders from large manufacturers and retailers decline. Nike provides details on consumer spending. Its high-end shoes are a luxury, and weakness in that business would signal a slowdown in the retail sector. Micron makes components used in computers, semiconductors, and other electronic products. It's a leading indicator of the tech sector. 

In addition to earnings from these companies, we will also see President Trump meet with China's President at the G-20 economic summit. The statement from that meeting will offer insights into the trade war. 

By this time next week, we could have a clearer picture of the next trend in stocks. In the meantime, over at Income Trader, we'll be using our simple, proven options trading strategy to generate hundreds -- even thousands -- of extra income with each trade. 

Each week since February 2013, I have provided subscribers with a low-risk put selling opportunity. Our track record speaks for itself: out of 267 official positions, 244 of them have been profitable -- good for a win-rate of 91%. It may sound too good to be true... but it's not. And I'm willing to prove it -- check out this free research to see for yourself.

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.