Market Overview

Not A Manic Monday: How To Proceed

Not A Manic Monday: How To Proceed
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Joel Elconin is the co-host of Benzinga's #PreMarket Prep, a daily trading idea radio show.

Across the board on Monday, the major U.S. indexes were deeply in the red and trying to battle back. After a tumultuous week of trading action, many large funds and investors have substantially raised the cash portion of their portfolio, and for good reason. One week ago, the U.S. markets were looking into the abyss, with the Dow Jones Industrial Average down over 1000 points and looking like it could fall another 2000 or 3000 points.

By week's end, the indexes were above where they settled the previous Friday; During the rallies on Thursday and Friday, sellers were lining up with offers. As a result, the September S&P 500 index futures have provided investors an excellent reference point on the upside.

Technically Speaking

In technical terms, it's characterized as a double top (two consecutive highs near the same price on a price-versus-time chart of the market). With respect to the S&P 500 index futures, Thursday's high came in at 1990.25 and Friday's high just above that at 1992.75. Throw in the psychological resistance level of 2,000 and the index put in place a formidable resistance level to contend with. Similar to the trading action is when the index peaked with an exact double top at 2126.25 on May 19 and July 20.

Related Link: Where Is The Market Headed?

Now What?

Now the tricky part. Since the market rarely repeats itself with trading action, there is not a manic Monday with stocks available at steep discounts. Instead, the decline off Monday's open was greeted with buyers and the index is now back in the vicinity of 1980, only 10 handles or so away from last week's highs.

Typically following a period of extreme volatility is a period of consolidation. So far, the upper end has been established in the index, but the question of a bottom remains.

At the time this article was written, the index may have been in the process of forming the bottom of the range with Friday's low (1967.25) being exceeded by five points to 1962.25 and rebounding back into the 1980 handle.

The waiting game for investors is complicated by the fact that the Federal Reserve is trying to decide whether or not to hike interest rates in September. Since Chairwoman Janet Yellen has maintained all along that the rate hike is data dependent, much of the decision may be based the results of Friday's unemployment data. Another strong report and chances are the rates will be hiked in September; A benign or poor report may prolong the hike until or December or into 2016.

How the market will react to either outcome is a coin flip. With the report preceding a three-day weekend (when strange thing are prone to happen) a relatively high cash position may be warranted.

Two-Pronged Approach

With all the looming uncertainty, how should the average investor approach the markets? Much of this depends on the makeup of a portfolio and where investors are at in their investment cycle. However, a two-pronged approach to the market is something to consider:

  • Focus on the issues that you wished you had purchased at last Monday's swoon and identify levels below the issue where you would comfortable dipping your toe in the water. On the upside, keep a close eye on the highs from the end of the week -- buying this dip on weakness may be a thing of the past.
  • One may reluctantly be forced to buy on the strength, which for the most part has been a profitable strategy over the last six years.

Posted-In: Premarket outlookFutures Technicals Intraday Update Markets Movers Trading Ideas Best of Benzinga


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