The Consumer Price Index (CPI) and Producer Price Index (PPI) for some reason didn’t have the effects on the market that you would expect…
The market as a whole this week has been quiet and the volume is nowhere to be found.
Between that, and some of the major indexes starting to consolidate after their latest bull run gives us the making of a technical pattern that we rarely talk about but has huge implications over the next two weeks.
As stocks continue to trade at overextended levels, watch the technical picture of the market. It shows both promises for the bulls and danger for the bears.
Yesterday in anticipation of the Producer Price Index (PPI) volume was -at one point – 30% lower than it should have been.
This along with the market consolidating for the past two weeks puts us into a market that is ready to break out of its Pennant Pattern and release us from the choppy environment that we’ve been in as of late.
Now, before we get into the charts, I pride myself on being a teacher of the market, not just a technician.
So, for those of you who are unfamiliar with a Pennant Pattern, it’s a type of continuation pattern formed when there is a large movement in a security – known as the flagpole – followed by a consolidation period with converging trend lines—the pennant—followed by a breakout movement in the same direction as the initial large movement.
It looks like this in its simplest form:
These patterns typically last about two to three weeks, during that time Kenny is having a field day trading in and out of the fluctuating market, but soon, it’s our time to shine when the market breaks out of the formation.
Let’s take a closer look at a few indices so I can show you how this plays out…
Nasdaq 100 (QQQ) shares have been forming a pennant pattern over the last two weeks with $310 serving as the top and $300 at the bottom of the shares’ tightening range.
Looking at the S&P 500 (SPY), a similar pattern is forming with a $415 top and $405 range bound by the indices’ 20-day moving average (trader’s Trendline) at the bottom.
And The small cap Russell 2000 ETF (IWM) has been forming the same pattern with the $190 level representing the lows.
From a technical perspective, a break of this pennant, likely to the upside, should release the market from its current “chop” environment.
That’s right the bearish CJ here calling for the market to make a move to the upside…
Once that run ends, expect to see some of the selling that has been absent in the market after the CPI and PPI reports start to ramp up.
This will cause the Market Breadth (the SPY50DAY indicator that I show you in the mornings) to break away from the 60-65% range it’s been moving in to start to drop.
The break below 60% will likely coincide with a change in Garrett’s momentum reading and might even be a little earlier. We will move to a more bearish bias as soon as this indicator cracks.
In the meantime high-beta stocks are still pressing higher, indicating that the FOMO trade is in effect. This is still the group to watch over the next week.
Only one more trading day without me on camera, I hope you haven’t missed me too much.
I’m going to take one more pass down the mountain forgetting how to form a pennant with my skis then I’ll be on my way home to spend some time with all of you!
Enjoy the long weekend, I’ll see you on the other side.
