foxex: Poised to Breakout

Chart Advisor | Focus on the Price

Monday, July 22, 2019

1. S&P 500 in Consolidation

2. VIX Near Major Support

3. Crude Oil Bounces on Tanker Seizure

Market Moves

The new trading week began somewhat uneventfully on Monday as earnings season continued and investors remained as confused as ever about the Fed's near-term interest rate trajectory. Stocks were mostly positive throughout the day, but ended up with rather tepid gains overall in the absence of major market-moving catalysts.

Last week, Fed members created a good amount of uncertainty and confusion by making seemingly contradictory points with respect to Fed monetary policy. New York Fed President John Williams appeared to sound a highly dovish tone in a speech, until his comments were walked back by a spokesperson who claimed that Williams had been misunderstood.

Then, Boston Fed President Eric Rosengren indicated on CNBC that he didn't want "to ease if the economy is doing perfectly well without that easing," contradicting the Fed's recent hawkish tones.

These mixed messages have left investors scratching their heads over where interest rates will be after the next FOMC meeting at the end of the month. While the market-viewed probability of any rate cut in a week and a half is still a full 100%, there are now much higher expectations of a 25-basis-point rate cut (77.5%) versus a 50-basis-point rate cut (22.5%). These figures were pretty much reversed last week after the New York Fed president's prematurely dovish speech.

Despite the current Fed confusion, markets held up well on Monday following last week's pullback from new record highs. Overall, though, stocks have been choppy and in a clear consolidation. As shown on the S&P 500 chart, this consolidation has taken the form of a small triangle, or pennant, pattern. Typically, such consolidations are resolved on significant breakouts. For the S&P 500, the technical direction of such a breakout is slightly biased to the upside given the prevailing uptrend and pennant pattern characteristics.

However, given the upcoming risks with respect to the late-July FOMC meeting and key upcoming earnings releases, the direction is much less clear. In the event of any upside breakout into new, uncharted territory, the first major upside target is around the 3,090 level, which is a key 161.8% Fibonacci extension level.

VIX Near Major Support

We've discussed the VIX at length here, mostly due to the low levels the index has been hitting of late. The VIX (or CBOE Volatility Index), also known as the "Fear Gauge," represents short-term volatility in S&P 500 index options. Indirectly, it measures investors' fears and concerns about the market overall. A higher reading indicates greater expectations of volatility, and therefore potentially greater fear. A lower reading denotes lower expectations of volatility and more complacency in the markets.

After Monday's relatively uneventful trading day and modest rise in equity markets, the VIX has come back down to the mid-13's. While this is still higher than it was early last week, the VIX is still way below both its 50-day average (just above 15) and 200-day average (just above 17).

This year, the major support level for the VIX has been around 12. Only very briefly has the index fallen below 12 at any point this year. This is important to note since the VIX is among the most mean-reverting of the market indexes — higher volatility tends to follow lower volatility, and vice versa. The VIX itself is not tradable, but there are tradable options and exchange-traded products (such as ETFs and ETNs) that can be used to express an opinion on market volatility.

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Crude Oil Bounces on Tanker Seizure

Crude oil futures rose around 1% on Monday after Iran's Revolutionary Guards seized a British oil tanker on Friday in retaliation for an earlier seizure of an Iranian tanker by the U.K. The seizure by Iran last week raised oil supply concerns, boosting crude prices.

It appears doubtful, however, that this incident alone will have much lasting impact on crude oil. Overshadowing any short-term supply concerns will likely be continued fears that global demand will decrease due to slowing economic growth worldwide.

As shown on the chart, the price of U.S. West Texas Intermediate crude oil has recently bounced off the key 55.00 support level. Given the prevailing downtrend in crude oil prices, any re-break below that level is likely to prompt a drop towards the next major downside target around the 51.00 support level.

The Bottom Line

The new trading week brings critical earnings releases and more speculation over the Fed's interest rate trajectory. Equity markets remain in consolidation just off new record highs and appear poised for a potential breakout. The direction of breakout will rely in large part on earnings and the Fed's words and actions in the days and weeks ahead. While volatility is low and complacency high in the current market environment, this dynamic is highly likely to change in the near-term, causing the market to break its current consolidation.

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