The major indices have been experiencing a classic consolidation over the last few days. The S&P 500 has traded in the tightest three-day range since August 2018. Consolidation of this sort helps to alleviate overbought conditions as one group of market participants takes profits and new buyers find entry points.
The August 2018 S&P 500 consolidation helped to set the stage for an upside move into late October 2018, when a sharp correction finally occurred. The patterns are never exactly the same, but this consolidation has already proven to be the foundation for a move higher this morning.
Chinese officials have announced that there is an agreement with the U.S. to cancel tariff increases in stages. There is no confirmation of this news yet from the U.S., but the market is celebrating the likelihood that progress is being made and that a Phase One deal will be signed at some point in November.
Despite the three-day consolidation, the indices are still technically overbought and the contrarian bears are pointing at a sharp increase in bullish sentiment as a warning sign. There has been very choppy action under the surface of the market as small-cap reporting season heats up. Small-caps are obviously more volatile and the risk of negative surprises to their earnings reports is quite high.
After a few good weeks, stock picking has become much more difficult again as many stocks need to rest and develop better charts. That takes some time and I find my cash levels raising simply because there are not enough good charts to buy.
On the macro front, the big issue for the market at this point is positive news events. Obviously the China trade news is the key right now, but the reaction to the news has been more sedate lately. The market totally ignored the delay of a meeting until November and this morning the news of a phase-out of tariff increases is positive but not wildly so.
There is not likely to be any news from the Fed for a while and earnings season is winding down, but there should be some economic news to cause some flutters. Political news is still being ignored by the market, but many market participants are watching the advance of Elizabeth Warren with a wary eye.
What we will have to watch for at this point is an intraday reversal. If the gap up open on this China trade news does not hold and the indices go red, that will be a change in character that requires some reaction. Right now, the bulls are in control but most all the significant corrective action has started when early strength was reversed intraday.