Of Multiple Tops

The S&P 500 has been flirting with a quadruple top recently.  By that I mean the index has flirted with a level of resistance that it has had trouble breaking through since the middle of last September for the 4th time.  Recently the index broke through that barrier but then promptly sold off and it's firmly back below that horizontal green resistance line running near the top of the chart above.  {You can double-click on the chart to make it larger.}  Stocks have hit trouble the last three times this has happened going back to last September.  The two failed attempts last fall set the stage for our large end of the year decline in 2018.  Failure at the end of April led to May's over 6% decline.  

The investment community is of two minds right now.  On the one side, triple tops are rare and quadruple tops even rarer.  Theory holds that each time you test these important levels resistance or support the weaker they become.   At some point under this thinking stocks should rip higher.  Investors who believe this would argue that we could potentially see a substantial move given the time we've spent in the current trading range.  The market has spent nearly 18 months locked in its current range, even longer if you mark the bottom of this current trading range to last winter's decline.  By that thinking, if or when we break out odds would favor a more sustained move.

The other side of that coin is more negative.  While we broke to new highs the other day, we also promptly sold off.  Stocks had about an 8.5% move off of their May lows and we're now over bought.  The fundamental backdrop is a bit dicey right now and at these levels stocks aren't necessarily cheap. Also history has shown in this consolidation that failed rally's have led to negative consequences.  I believe traders in this camp would argue that markets should at a minimum retest the levels we saw at the end of May and that would point towards further upside.

So there's the two extreme views right now.  The environment is somewhat negative on the Street and frankly the Wall Street crowd is more interested in the 4th of July holiday break right now than what's going on with stocks. Still we could get positive news out of this weekends G-20 meeting between President's Xi and Trump on the trade war front and maybe the Federal Reserve will lower interest rates in July so there is the potential there for an upside surprise.  I also think there might be a third scenario and that's for stocks to essentially do nothing.  Maybe we sell off a bit and then find some level of equilibrium where stocks in essence just float around for a big part of the summer.  That would be similar to what happened in 2017 when The SPY traded for two months in about an 8 point range and last summer when from mid-June on stocks moved in about a 12 point range.  That would also be in keeping with my theory of seasonality which discusses the late summer early autumn period on being traditionally one of the worst for stocks.

For us, we'll monitor the situation and let our indicators be our guide.

Chart is from Tradingview.com although the annotations are mine.

Back Monday.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time   We reserve the right to change any of these investments without notice on this blog or via any other form of verbal, written or electronic communication.