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THE RIGHT CALL AT THE WRONG TIME

A few weeks back, I predicted that we would see an increase in short term market volatility...

http://tancockstradingblog.blogspot.com/2016/04/technical-indicators-point-to-more.html

While that forecast did not exactly come to fruition at the time, the market action we've seen over the past couple of days is the manifestation of the technical pattern that lead to that call.

Here's the chart of the SPY to illustrate the point:


The red arrow signifies the chart pattern at the time of the previous call and the circle points to where we're at as of the close today (Friday, 4/29).  This is the infamous (to me anyways) fill gap pattern, where prices have a tendency to consolidate inside of the 20/50 day moving average range before finding direction and breaking out again.

http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html

If the pattern holds true, we can expect to see the broad market consolidate inside of this range before it makes its next move higher or lower.


THE MILLION DOLLAR QUESTION

Assuming the pattern does hold and the market consolidates, the larger question becomes 'what direction will equities take next?'  Recent history suggests that we could see another round of market volatility, similar to that of August and January, if the markets were to break lower.  Looking at a longer duration chart, we can see the markets have been making progressively lower lows and lower highs:


This is an ominous trend and it could be enough for markets to come under significant duress if recent support levels are broken.

On the other hand, the macroeconomic environment - in regards to equity markets anyway - is more favorable today than it was in either January or August.  Namely, the depreciation in the dollar has helped to boost commodity prices and it creates a favorable environment for future corporate earnings (which have been less than inspiring for Q1).

Regardless of reasons for optimism, there continues to be the elephant in the room in the form of the health of the Chinese economy.  Should the bearish predictions for China come to fruition (some people are calling China a giant Ponzi scheme) then we would be facing a full blown global economic event and all bets would be off... correlations will go to 1 and there will be pain on the streets across the globe circa 2008.  China related stocks and ETFs (WYNN, LVS, FXI, EWH) are showing signs of renewed stress after a brief recovery... this could just be market beta or it could be the canary in the coal mine.

Either way, I believe the next few weeks will be a significant indicator of how the market will perform for the rest of the year.  If support levels hold, a lower dollar could propel markets to make new highs amid dampening volatility.  To me, the key support levels to watch over the next few weeks are the 50-day moving average and the previous low of 1830 on the S&P.  If these support levels are broken, brace yourselves because we could be in for a very bumpy ride.

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