In recent weeks, the market has, for all intents and purposes, been trendless. While there were plenty of option trades, especially trades related to earnings announcements, options on the major indexes only decayed in value. So, we know that markets go in a constant cycle from, low volatility to high volatility, and right now is a low volatility period. So, what should we be watching to see what the next high volatility period will bring?
Here’s a chart of DIA, which tracks the Dow Jones Industrials
Thus far, the Dow is the weakest of the averages, and it is already making a sort of a “rounding top,” which was briefly broken down from last week. Given the action currently, in the pre-market session, another breakdown will likely occur at the open.
Anyway, since markets often tend to be correlated, a breakdown in one average should be followed by breakdowns in the other average. Here’s the S & P 500.
It looks a bit stronger, as it has not broken down yet, but it may be tracing out a short term head and shoulders top. If this pattern breaks down below its neckline (green upsloping trendline), we could expect a move down to at least about 1660. Just something to watch.
It’s the same case with the broad Russell 2000 Index. While it is a bad idea to always trade based on an unconfirmed formation, a breakdown would indicate that the Russell could decline to fill its mid-July gap.
The NASDAQ, likely the strongest, is actually not showing any signs of a potential breakdown. However, investors should be warned that it looks like only a select number of exceptionally strong large cap stocks are holding up the index in the short term.
So, in the near term, that’s what to keep your eyes on. Before initiating any short term hedging or bearish positions, make sure every index is rolling over. Have a great trading day!