More of a Fake-out Than a Breakout Coming

 | Aug 07, 2017 | 6:00 AM EDT
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The burning question these days is: when will we see the S&P 500 get out of the current range it is in? The next question is: which way will it break, when it does finally exit this now 13-day seven-point range?

While it is my style to spend more time looking at the indicators than the price pattern of the S&P 500 to determine the next move, I did study the chart this weekend. What I noticed is that in 2017 we have seen three other relatively small trading ranges that lasted a few weeks, although none as small as the current one. Let's take a look.

For three weeks in January, the S&P 500 traded in a 20-point range. Then it broke out on a gap, milled around a few days and came right back into the range before taking off and ramping upward. So, the first move was a shakeout of the shorts. The second move was a shakeout of the longs. Let's call it a whipsaw for both sides.

In late April and into early May, again for three weeks, we saw another 20-point range for the S&P 500. Then it broke down -- from the top of the range, the bottom fell out as the market gapped down under the range. And then it rallied, marching higher beyond the previous high. Once again, it was a shakeout first.

Nearly the entire month of June was spent in a 20-point range for the S&P 500. There was one push up and out in the middle of the month. It probably ran the shorts in and then, as you can see, the next two weeks saw a 50-point decline and break to the bottom of the range. The lower break, in early July, likely shook out the longs. So once again, similar to January, we saw a whipsaw for both sides.

Just based on these three prior patterns I would have to think that whatever move we get out of the range first will see a relatively quick move back into the range. If we go back to the indicators, then you know that I have been of the mind that we should try and rally up before we go back down.

So far, the modest oversold condition has resulted in a whopping four-point rally for the S&P 500 in the past week and Friday managed to see the Russell 2000 finally enjoy a day on the green side. I'd call that nothing to write home about -- not to mention the S&P 500 hasn't been able to break out of the range. But I suppose the real message from this exercise is that we should beware of the first break out of the range, since that seems to be more of a fake-out than a breakout.

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