Pre-Election S&P Action Remains on Random Walk, But New Battle Lines Drawn

October 28, 2016 3:25AM CDT

Given that all markets spend about 2/3rds of their time doing something other than trending (i.e. consolidating or reversing), there should be little doubt that the aimless, lateral chop the S&P market has experienced since 23-Aug's 2192 all-time high is exactly the kind of price action that contributed to Burton Malkeil's theory that Wall Street stock price action takes a totally random path and that both technical and fundamental analysis are a waste of time.  Obviously we disagree with this theory and chalk up such price action as either corrective within the ongoing trend or part of a peak/reversal process with specific technical levels and parameters around which to make preferred risk/reward bets of an expected outcome.

(Insert shout-out to RJO-friend, IB and industry vet Andy Gottschalk of for reminding us of Mr. Malkiel's theory in a technical workshop in Denver last year.  Tks Andy!

Emini 240

IN the 240-min bar chart above, overnight's failure below our short-term risk parameter defined by 21-Oct's 2123 low renders the mid-Oct recovery attempt from 2107 to 2150 as another 3-wave affair as labeled.  The important and objective by-product of this relapse is the market's definition of Tue's 2150 high as the latest smaller-degree corrective high and new short-term risk parameter the market now would be required to sustain losses below IF something bigger to the bear side is developing. By the same token however 13-Oct's 2117 low on a 240-min close-only basis below remains intact as a precise level and risk parameter the market still needs to break to mitigate a clear lateral triangle structure that is about as corrective and consolidating as it gets.  And on the heels of the long-term bull trend, odds favor an eventual resumption of the longer-term uptrend following such lateral, random, corrective price action UNTIL the market breaks some market defined lower threshold like 2117 or 12-Sep's 2100 lower intra-day boundary we'll discuss below.

Not only are such lateral, choppy, frustrating environments a fact of trading life, we EXPECT them about 2/3rds of the time and warn traders to act accordingly with a more conservative approach to risk assumption.  For indeed, odds of winning trading decisions are stacked even more against traders than they typically are and highlight the mantra of cutting one's losses short.  We guaranty, this lateral chop WILL eventually end in either a clear resumption of the secular bull trend above 2192 or threaten or negate that major bull with a breakdown below 2100, each specific level being the key longer-term directional triggers.

Emini 240

Emini Daily

Heading into one of the biggest fundamental events of a multi-year span- the U.S. presidential election- it's not hard to fathom the entire globes indecision and lack of commitment that has resulted in the past couple months' lateral chop.  Casting all the political crap aside and, as always, the technical picture shown in the daily log chart above and weekly log chart below provides the most factual assessment of the S&P market and odds of next key directional move.

The secular bull market has yet to be broken.  Weakness below AT LEAST 27-Jun's 1981 long-term risk parameter is minimally required to threaten the multi-year advance.  On a more practical but still longer-term basis, odds favor the market's mere lateral price action from 23-Aug's 2192 high as merely corrective/consolidative following Jun-Aug's clear uptrend from 1981 to 2192. Former 2134-to-2105-range resistance from May'15 until Jul'16's bust-out has thus far played its role well as new support.  These are not technical suspicions or subjective assessments, they are facts that are consistent with a bullish policy calling for an eventual resumption of the uptrend that preceded this lateral chop.

Another great thing about technical analysis is the ability to specifically identify the RISK or cost of a decision to buy or sell.  And currently, it is clear that a break below 12-Sep's 2100 low is required to negate our specific longer-term bullish count and confirm a larger-degree correction or reversal lower that would warrant all bullish exposure to be covered. Until such weakness is proven, longer-term players remain advised to maintain a bullish policy and exposure.  Near-term strength above 2150 will reinforce this bullish count while, at the same time, negate any short-term bearish decisions resulting from overnight's skid below 2123.

In the end, the market has identified 2150 and 2100 as the key directional triggers heading forward.  We've got about a week-and-a-half until the election's over.  Whether or not the markets stays confined to this range remains a random coin flip.  And while traders remain advised to beware such aimless chop while the market remains between these specific decision-making points, they should take solace in the fact that the market has identified such specific technical levels around which their next moves can be objectively based and managed.

Emini Weekly

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.