Current Market Environment

Current Market Environment

We are in the heart of earnings season and, therefore, many of the stocks we might want to trade have upcoming earnings. That doesn’t mean to avoid them outright, but it does caution traders about the risk of outsized moves which might not follow the script set out by technical charts.

The indices and internals, however, can still give us a good picture of the overall market environment. The S&P 500 remains in a bullish configuration. We track several exponential moving averages including the 8 (yellow), 21 (white), 34 (magenta), 55 (cyan), and 89 (red). On the daily chart, these averages appear in order with the shorter period averages above the longer period averages and price is hanging on near the 8 EMA. This is exactly what we want to see for an uptrending market.

A number of other market internals can help give us guidance about whether the market is at extremes to the upside or downside and, therefore, susceptible to a turn. All are Neutral right now which tells us to look for continuation of whatever the current trend is. In this case, that means follow the current bullish S&P 500 chart.

market internals S&P 500

To start the week, there were more significant warning signs. Most notably, the Put/Call ratio of S&P 500 options was below 1.75. While this absolute level sometimes signals the potential for a few days of selling, we noted that this magenta indicator on our charts was staying above the cyan line representing a 20-day moving average. That suggested that even though the level was a bit lower than we would like, it wasn’t very low compared to recent values. And since then it has carried well above our warning level suggesting we don’t even have much of a short-term worry right now.

Other longer-term indicators weren’t yet on warnings, but looked like they could get there. As the week kicked off, the 10-day moving average of the put/call ratio of all issues was nearing the 0.85 warning level and the VIX was nearing its lower Bollinger Band. Both have also since moved up into a safer range. This highlights the importance of not treating these levels as warnings until signals actually register. Getting close is just a “warning of a potential warning” and traders can drive themselves crazy trying to anticipate when a caution signal might actually register.

The CBOE SKEW has also slowed its rise from the past week or so and remains below its warning level of 135.

None of these warnings would tell us that the market would necessarily lead to an immediate turn but they would suggest that the environment was ripe for a bout of selling. Without any warnings, the situation seems to favor ongoing uptrends for the market as a whole. That suggests no reason to get out of bullish positions which are working and to look more for bullish setups than for bearish ones.

If some of the warning indicators continue to flirt with bearish signals, then it might make sense to look for shorter timeframe setups lasting a few days or so. Trades off the weekly or daily charts looking for trends lasting a few weeks or longer might strain the longevity of the immediate uptrend.

Elliott wave patterns tend to concur with this assessment. The move up since early November seems incomplete but might be late in development. In this stage of a run, moves tend to be choppier and breadth tends to narrow with fewer leaders taking the market up. So that also advocates for focusing on only the best-looking bullish charts.

David Starr

David Starr Elliott Wave Expert

After finding success in the business world and pursuing the entrepreneurial path, raising venture funding, and taking companies public, David began a more active trading career about 12 years ago.

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