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S&P500 is trading within a tight range on thin volume

Index Analysis – S&P500

On the 10th of November 2021, the US CPI data showed that inflation was rising rapidly and that at 6.2% the CPI print was the highest since November of 1990.

Earlier this week the rates in the 2, 5 & 10-year yields lifted again as Fed Chair Powell was given the job for a second term. Some of the lower rates for longer trades were obviously unwound when Brainard failed to dethrone Chair Powell. Tonight, we hear from the FOMC’s latest meeting as the minutes are being published. At which point we will probably have the last big pop, maybe bang before the US markets start to close for the holiday season.

Tomorrow is Thanksgiving in the US, and the markets will be very quiet, and again on Friday, it is doubtful whether there will be much volume in the main indices.

The Nasdaq, Dow Jones Industrial Average and S&P500 are up 33.55%, 18.61% and 28.36% for the year respectively, so there is a genuine case for those money managers to not trade for the rest of the year locking in those profits. The tech stocks are definitely seeing more volatility come into the markets as the inflation narrative builds.

The daily chart for the S&P500 is starting to look more bearish as the days go on with Monday’s blow-off top, shooting star candle pattern likely to have trapped quite a few traders long, or maybe stopped out any traders who were previously trying to short the index. On the 10th we received the US CPI print, but we also had a new swing low form on the S&P500. Until that low of 4631 is removed, the higher time frame trend is still intact to the upside. Some wiser traders would also say it’s best not to short a quiet market.

To aid the directional bias I am following a few charts, the yields as above, the TLT and the VIX.

Yesterday the VIX spiked higher to the highest reading since October 2021. The TLT dropped and closed at its lows. The S&P500 had dipped lower during the start of the US session but then closed flat for the day after tagging the Monday close.

On the hourly chart, the S&P500 is making new lower highs and new lower lows, so if the bulls are to reclaim the upper hand, they will need to take out 4700 without testing yesterday’s lows of 4652 or below. The VIX is suggesting that volatility is returning to the markets and the lower TLT is usually a sign of markets moving out of safe havens and into risk assets. Recently it has been moving on the inflation narrative. Today’s PCE readings are part of the inflation story that the Fed leans on heavily and the Core PCE came in as expected today, with a slight uptick on the previous month. Personal spending is up MoM with the higher prices of goods the most likely reason, rather than the exuberance of spending ahead of the holidays.

US durable goods orders dropped showing US manufacturing could be slowing down. This would be a negative for the economy. Though durable goods ex-Transport came in as expected and only slightly lower than the previously revised higher reading. US durables ex-defence were up by nearly 3% from the previous reading, so this is a positive for the wider manufacturing sector.

The other part of the Feds mandate is to create an economy to support maximum employment, so today's initial jobless claims reading will be very well received, especially if the NFP next week comes in better than expected.

So, for the bears of the S&P500, a break of the swing low of 4631 will likely lead to a test of the 4552 level and the 161.80% Fibonacci extension. For the bulls, the likelihood is that a breach of 4700 will lead to all-time highs being printed in the next week or so, with major resistance at 4700, 4710, 4715 and the current all-time high of 4744.

Waiting for a breakout, retest and continuation higher would be my preferred trade, with a dip down into the current trading zone as an opportunity to get a better entry after the market structure at 4700 had been breached.

There is nothing to do while the market chops sideways within the 4700 to 4658 range, especially before the FOMC news tonight. It is better for the market to make a move and then to follow on later. Other than that, maybe waiting until next Monday before taking a trade would be beneficial as the outlook would potentially be clearer.

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