In Between Patterns

Last week failed to close above the 4232.60 level for the S&P 500 setting up an interesting test for this week. Can the SPX push through to new all-time highs this week, or will the index bleed off momentum and shift toward a neutral-to-negative sideways trend?

Based on the scientific-wild-ass-guess (SWAG) technique, the evidence — including meme stocks, social media, the licking of one’s thumb and sticking it into the breeze, and the part where every news station on the planet seems to be talking about commodity inflation — suggests this market will go higher.

Wait… what?

Yes, you read that right. Consider it an irony reading – contrarian if you will. When retail investors are afraid, professional experience (mine, ha ha) suggests markets can keep climbing the wall of worry higher.

As discussed in the past several BigFoot Forum calls, the working theory is that this market is primarily driven by the Fed and the cost of capital. The Fed continues to affirm a low-interest-rate backdrop. This suggests the risk/reward tradeoffs remain largely unchanged at this point. Relative to bond yields, stocks still don’t look too bad.

When this changes… and history tells us it will… expect the markets to shift. The question is when.

Memes about $75 sheets of plywood being traded for vintage cars suggests consumers know some assets have inflated a lot. Look no further than food, energy, and housing to witness inflation in real time.

Wage inflation is real. Unemployment is still real. Supply chain disruption is still real. The thing is, these are pretty visible to the retail marketplace. Assuming the disincentive to work (where unemployment pays better than employment) ultimately shifts, then things can get interesting. Until then, it looks like the Fed must continue to hedge its bets on raising interest rates.

Oh, and if you’re wondering about Washington, D.C. and how fiscal policy will affect the markets… so is everyone else. At this point, the disfunction in the capital can get nothing done quickly. So the best the markets can do is guess about what will actually happen… an infrastructure spending package loaded with pork? Or a smaller infrastructure spending package loaded with pork?

So where does this leave the technical picture?

Well, last week was a 4-day trading week thanks to the Memorial Day holiday. While much of the trading is bots and algo’s these days, 4-day trading weeks (according to my SWAG theories) tend to be more volatile. The good news about last week, at least from a technical vantage point, is it looks like the SPX bounced off of support to challenge the week near the resistance point.

Monday futures suggest resistance will be challenged right out of the gate today. So the 4232.60 figure should still be in play. A close above this level would suggest the markets will extend their trading range higher after breaking above the previous all-time-high mark. The concern would be a intra-day push above this level, but a failure to close above it. This would suggest resistance is higher and a sideways pattern with more volatility would follow.

For the week, look for a close above 4232.60, with the next resistance level to be at about 4265 or so. Soft support is at 4213, with more material support at 4170.

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