The stock market just flashed a technical signal suggesting more upside ahead, but investors shouldn't chase the rally, Fairlead Strategies says

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  • The S&P 500’s upside move in recent weeks was confirmed with a minor breakout on Monday, according to Fairlead Strategies.
  • The breakout suggests that the S&P 500 could jump another 4% from current levels to 4,270.
  • But investors shouldn’t chase the rally just yet as the Volatility Index shows signs of a rebound.

The stock market’s 9% surge in July extended into the first day of August, with the S&P 500 confirming a minor technical breakout in Monday’s trading session, according to Fairlead Strategies’ Katie Stockton.

The breakout suggests the S&P 500 has at least 4% upside ahead, with the next level of resistance for the index sitting around 4,270. The S&P 500 hovered around 4,100 on Tuesday.

“Short-term momentum remains to the upside, but we expect it to wane and would not chase the rally,” Stockton said in a Tuesday note to clients.

Stockton’s view that investors will get a more attractive entry point into stocks down the road is based on action in Wall Street’s fear gauge, the Volatility Index. According to Stockton, the VIX is showing signs of a rebound after bouncing off of long-term trendline support. That means the current cycle of high-volatility in the stock market is still intact and likely to linger.

“Our short-term indicators have turned up, supporting a near-term increase in volatility that suggests it may be prudent to stay with existing market hedges despite the minor breakout in the S&P 500,” Stockton said.

Instead of chasing the rally at current levels, Stockton said investors should look for any pullback in the market that creates a higher low “given a new weekly [moving average convergence divergence] buy signal.”

Since the start of the year, the S&P 500 has been consistently making lower lows and lower highs as it trended downwards. A higher low would be a signal that the downward trend in stocks could be in the early stages of reversing, and that level would likely provide a more opportune time to buy stocks.

The S&P 500 has not yet managed to make a higher high, but is close to doing so if it decisively closes above 4,200, which is above the highs seen in June.