As I’ve been pointing out all month in August, the stock market is in a period of indecision, that it will eventually break out of.
Looking at the price trend of the S&P 500 index over the past six months, todays 1.4% move so far has the trend tapping the upper end of the range.
Zooming in to the beginning of the month of August, it’s been a month of indecision. Those who want to buy are battling with those who want to sell.
The range of the price trend has spread out, as was implied by the CBOE S&P 500 Volatility Index VIX. It’s been a relatively volatile month with this big-cap stock index swinging up and down in a range of 4%. As we can see in the chart below, the VIX trended up sharply as stocks declined in price.
What we also see, however, is implied is settling back down as the price trend is swinging up and down in this 4% range of indecision.
What’s going to happen next?
I don’t need to know what’s going to happen next. I know exactly what I’ll do next with my positions if they continue trending up, or reverse back down.
Using this stock index as an example, if it breaks below this range it’s bearish, but if it has the buying demand to break above it, the uptrend resumes.
That’s why we call price action as we’ve seen this month a base patter and we’ll eventually see a big move out of it one direction or the other.
The S&P 500 index is an unmanaged index and cannot be invested into directly, but if we could and I wanted to be long stocks, I would exit if it fell below the three recent lows.
If I wanted to be short, I would exit if it broke out above the prior high.
This is just an oversimplified example of how I tactically manage risk.
Hurricane Dorian looks to add to the August volaltity. Hurricane Dorian is now expected to intensify into a Category 4 hurricane as it moves toward Florida and the U.S. Let’s hope it loses its momentum. I’m in Tampa Bay on the other side. It should slow down by the time it reaches us. Our home is made of concrete, tile roof, and 150 MPH hurricane windows, so we’ll be fine.
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