In recent weeks, exchange traded funds indexed to the S&P 500 have been unable to pierce their 200-day simple moving average and sustain any upward momentum.
Equity ETFs stumbled into the week Monday on news Congress’s “supercommittee” is set to announce it has failed to reach a deal on cutting the U.S. deficit. Monday’s sell-off pushed the S&P 500 below its 50-day moving average. [Stock ETFs Down on Supercommittee Failure]
Recent highs of 1,292.66 and 1,277.55 were registered in the past month in the S&P 500, but were quickly met with selling pressure as an extended rally in equities has been anything but sustainable.
Last week was marred with more negative energy coming from the European markets that did not translate well here in the U.S., and the S&P 500 closed at its lowest point in about a month.
Our market technician David Chojnacki recently pointed out that the range in the SPX has been narrowing, and was developing a “pennant pattern.” In technical analysis, this is a continuation pattern that exhibits smaller ranges and lower volatility, and in our estimates, a 5% move to the upside is very possible based on the current technical set up.
Even a novice to technical analysis can look at a chart of the SPX and will note that since the markets fiercely rebounded from the early October lows, that the trend has been somewhat of a narrow channel in between SPX 1,200-1,300, with volatility lessening as time has gone on.
On the note of volatility, the VIX crept higher on the week but still remains below its 50-day moving average. From an options standpoint, mostly upside call buyers, mainly in 40 and 47.50 strikes have been present in VIX, and are likely hedging portfolios going into year end against any unexpected events that may cause a sudden and severe spike in overall volatility.
From a fund flows standpoint, volumes were low last week, which is not entirely surprising heading into the shortened week of Thanksgiving, and even options expiration on Friday failed to give the market much momentum in either direction. With the SPX continuing to channel in between its 200- and 50-day moving averages, we will watch closely in coming weeks to see if there is any indication of a breakout or breakdown of any type.