The market is building a temporary layer of support.

While there are risks lurking in the background, I think the market is building a layer of support at 3600 and we likely rally temporarily from here.

One of my favorite 90’s action movies was “Cliffhanger”, starring Sylvester Stallone. In one of the early scenes, his climbing group is trying to cross a ravine on a wire and one member of the party slips and Sylvester Stallone’s character grabs her and holds on for as long as he can. The wind swings and it looks like she will fall, but he holds on. She desperately tries to climb up his arm putting even more pressure on him and still, he holds on. At the very end however, despite all this strength, his grip falls and she falls into the abyss. This scene reminds me of the current stock market, hanging on for dear life over a cliff, but struggling with everything it has not to fall.

If anyone has been watching the S&P 500 Index over the past few weeks you will notice that we have been range-bound in the 3600 range for over a month. The chart below shows the range of the S&P 500 Index over the past month.

As you can see, between Sept 20 and Oct 21, the S&P has bounced between 3820 on the high and 3587 on the low. We have double bottomed twice right near 3585 and have double-topped twice near 3820. Essentially, this chart tells us nothing, except that we are range-bound. A good technical trader would not make any moves until the market has broken significantly above or below this range. However, as traders, we cannot wed ourselves to just technical analysis. We need to look beyond the charts to try and assess where this market is headed in order to trade ahead of it.

In my opinion, this market is heading higher temporarily for a few reasons. First, the market has had every opportunity to crash. On Friday October 7 and October 14, the market headed into the weekend with an abysmal close, only to rally right back on the following Monday. The market had a very steep sell-off after the latest CPI numbers came in hotter than expected and then reversed extremely quickly to end the day +2.5%. Finally, on Thursday evening, the US Dollar index and Bond yields began to move overnight in parabolic fashion. All my indicators were showing that the equities market was setting up for a serious financial bloodbath. Futures tanked and it seemed like the market was finally going to get its “Black Friday” moment. The opposite occurred however, a Wall Street Journal article hit the wires fifteen minutes before the market opened hinting that the Fed was ready to pivot on their raising rates. This sent futures flying and the market rallied 2.5% throughout the day.

When a market has every chance and opportunity to fall and just refuses to, that is often a sign of short-term bullishness. Additionally, markets often stage a rally near midterm elections. The window for the bears to get their market flush is quickly closing. If the Republicans take either the House or Senate, or both, the markets will likely react positively as a stalemate in Washington is often seen as bullish. Finally, we will be getting into mid-November and December, often very seasonally bullish months as stocks often state the “Santa Claus” rally.

This is not to say that everything is rosy for the markets, because clearly it is not. Geo-political risk is still very much on the table, as well as continued inflation risks and poor earnings reports. The way I plan to trade this market is to err on the long side, most likely using futures, but taking some leveraged positions in my favorite names. I plan to keep very tight stops and dump my positions quickly if the market is not as bullish as I think it will be. I would not feel comfortable taking a big long position until the S&P 500 breaks 3850 with momentum.

I want to be very clear that I think this bullish trend will last only into mid-December. Heading into the new year is when I suspect reality will set in. The stock market is not reflecting the ever-deteriorating macro-economic environment to include the risks of contagion from the slow collapse of Credit Suisse, geo-political risks or the strain that significantly higher interest rates will put on corporations and the economy. I would say that the bear market is not over, it will just be hibernating until the New Year.

Good Luck Everyone! Happy Trading. Remember, cut your losses quickly and let your winners run.

-Russell

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**As Always, this article was not financial advice. For financial advice, please consult with a licensed financial advisor for your particular financial situation.**