Conviction is Low, on Both Sides of the Table

Posted by jbrumley on August 16, 2018 5:15 PM

In the grand scheme of things it can't be too terribly surprising. After all, it is the dog days of summer. Traders aren't terribly interested, and somewhat distracted by all the other things that require attention as August starts to molt into September. It would be surprising if the market was throwing out serious fireworks.

All the same, between Wednesday's action and Thursday's action, if you were hoping the market collective would tip its hand as to its true undertow, you've got to be disappointed in little conviction traders have here... in either direction.

Yes, the third reversal in three days is a clue to that end, though not necessarily the big one we want to focus on.  Arguably more important is the shape of Wednesday's bar for the S&P 500, and the subsequent shape of Thursday's bar for the index.

That's what the image below is - a daily chart of the past few weeks for the S&P 500. Wednesday's bar is marked with a yellow arrow, and Thursday's trading is marked with a pink one. Notice for both bars what happened, or more specifically, what didn't happen. In each case, the most active traders pared back on their activity before the closing bell rang. On Wednesday the sellers were gung-ho early on, but the index partially bounced back in the latter part of the day to bring the market back from its lows. On Thursday's bar the bulls were charging, but decided to be considerably less bullish later on, letting the index close below its high.

In both cases, it's a sign that traders weren't entirely convinced they could even afford to carry their trades overnight into the next day's session.

In a different context, and under different circumstances, these 'hammer' shaped bars would serve is pivot points, out of one trend and into another in the opposite direction. We don't have any of that context or the proper circumstances though. We just have a bunch of people who don't know what to think, extending a phase of indecision that actually took shape in late July.  

And for the record, the VIX is indicating the same degree of uncertainty.

As for what you need to 'do' with the information, the answer is... nothing. At least not yet. Until this uncertainty abates and most traders are at least willing to stick with their trades for one night, choppiness is the only thing on the menu. That chop can be day-traded, if you know to expect. If you're looking to swing trade a few multi-day moves though, this is a tough environment to do that in.

Not impossible, but tough.

That doesn't mean you can stop watching the market. As always, you should be ready for all contingencies. Traders are a little more emotionally revved up than usual, and anything's possible from here. It could, however, take a few days for traders to fully restore the confidence they don't seem to have right now.

Just for the record though, in a more philosophical sense, the market is long overdue for a pullback... a more meaningful pullback than June's, and really, a bigger one than February's. Stocks need a hard landing -- a true capitulation - to hit the proverbial 'reset' button so they can start trending better rather than just chop around. Traders haven't been willing to let that happen though. They've been quick to scoop things up after decent dips. More recently they've been quick to scoop things up after mere blips, which is why we're back in indecision mode right now.

In any case, we just wanted to point out the shape of the daily bars for the last two days, and talk about the bigger-picture implications. This is a slow, grinding, erratic environment, and could remain so for a while. You'll know when it's over when we start to see (1) consecutive bars moving in the same direction, and (2) closes nearer than not to the low or high for the day.

It's the little things.

BECOME A BIG TRENDS INSIDER! IT’S FREE!