Thursday, August 15, 2013

A Look At The Market's Technicals

What follows are a few thoughts on some of the technical factors influencing the market advance since the financial crisis. A couple of the factors, the Fed's involvement via quantitative easing and the increase in algorithmic trading, seem to be having a larger influence on the market of late. Institutional investors/traders have a heighten interest in the Fed's open market operations as the Fed activity does seem to influence the equity market's direction. Investors/traders seem to be focused on the Fed's monetary operations and follow this activity via the Fed's open market schedule. The Fed forecasts its activity via its open market schedule that is published at the beginning of each month. For August the schedule indicates the Fed has large Treasury purchases scheduled for Thursday and Friday of this week--not surprising since it is an option expiration week.

In addition to Fed activity, technical chart pattern setups have been influencing the market as well. Institutional investors, and more specifically technical traders, are following chart pattern setups that trigger their trading activity. Beyond chart pattern setups, algorithmic trading programs are capable of trading on news flow such as Twitter tweets. A recent example is Carl Icahn's tweet that he accumulated a position in Apple's (AAPL) common stock and the resulting rise in Apple's stock price.

The market pullback over the last two weeks, although small in relation to the market's year to date advance, has triggerred a head and shoulders bearish pattern setup that began its formation in July as evidenced by the below chart from The Kirk Report. This technical setup shows a downside target for the S&P 500 Index at 1,650. The chart is an example of the type of information traders are following that influences their trading activity.

From The Blog of HORAN Capital Advisors

Additionally, the S&P 500 Index close of 1,661 on Thursday is just above the index's 50 day moving average of 1,656. The 50 day moving average price and the bearish S&P head and shoulders target of 1,650 will be important levels in the trading days ahead. As we have noted in prior posts, the money flow index is one indicator that can identify reversals in momentum. As the below chart notes, the MFI has turned higher.

From The Blog of HORAN Capital Advisors

The recent market pullback has occurred on lower volume as detailed in the above chart. This is not atypical for trading activity in the summer as vacations seem to be the focus for traders. Additionally, some of the overbought market conditions have been reduced when one looks at the percentage of stocks trading above their 50 and 150 day moving averages.

From The Blog of HORAN Capital Advisors

Somewhat surprising during this market decline is the VIX continues to trade below 15. The website VIX and More recently published an article showing the market corrections since 2009. In all of the declines noted in the article, the VIX rose above 18 at least once.

From The Blog of HORAN Capital Advisors

A couple of events on the horizon that could perpetuate the decline then,

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