The Market Is Upset — But It’s Heading Higher

Babies cry sometimes. 

Now, I know all of you already know that. As a parent to young boys, I certainly know it. 

But when babies cry, there’s something we often don’t know: why

When a baby cries, parents and caregivers scramble to find what’s wrong. Crying could mean the baby is hungry, or the baby needs to be changed, or it could mean almost anything. Crying just means that attention is needed, and the truth is that we might never know the real cause. 

For now, the stock market is like a crying baby. It needs attention, but we don’t really know why the baby is crying. 

A week ago, the market was bearish. The S&P 500 Index was below its 200-day moving average (MA). News was alarming, with the threat of tariffs hanging over the market. Yet traders ignored all of that and the stock market climbed higher, closing up for the last four days of the week. 

S&P chart

But we still don’t know why the market is crying. All we know for now is that the market needs attention. Just like with the baby, we need to try to understand what’s needed. 

The simplest approach might be to wait for the market to tell us what lies ahead. Looking to the charts, we can find technical trends in the market. In the next chart of the S&P 500, I’ve highlighted a trading range in blue. Targets are also shown, and I’ll explain more below the chart. 

S&P trading range chart

The trading range is unusually precise. The June low was just 0.2% above the March low. In April and May, the top of the range formed as prices moved within a price band that lasted two weeks and covered just 1.5%. 

It could simply be best to wait for a breakout. New highs will lead to buyers rushing into the market, and that should set off a rapid surge in prices. 

This seems to be the most likely outcome. There is more than $3.1 trillion in money market funds ready to be invested. The most recent data shows institutional investors are holding $1.9 trillion in cash while individuals are holding $1.2 trillion. 

Cash has built up as investors have worried about a decline. The most recent American Association of Individual Investors (AAII) survey shows just 22.5% of respondents expect gains in the next six months. 

AAII survey 

Previous readings like this in the survey have been followed by gains. 

#-ad_banner-#There are equally compelling arguments for the bearish scenario. But the break below the 200-day MA and rapid reversal is a strong argument for more gains. It looks like a failed “sell” signal. 

Failed signals are unusually important. 

My friend, Larry Williams, called one type of failed signal an “oops” pattern because traders who sell the break quickly suffer losses, say “oops,” and reverse their position by buying. Their buying pushes prices up, creating additional “buy” signals and sending prices even higher. 

The final chart I want to consider is the reversal in my Profit Amplifier Momentum (PAM) indicator that developed last week. On this weekly chart, PAM is back into bullish territory, topping the highs the indicator saw in March as this trading range began. In the chart, I’ve kept the blue box that highlighted the trading range in the daily chart above. 

S&P PAM chart

Last week, I noted that PAM was at an important point and with “another weekly close in bearish territory, there is a possibility we could challenge the December low in price.” That didn’t happen, and we are now looking at potential new highs. 

Action To Take
The market is screaming for our attention, and we are searching for clues as to what it needs. Most of the clues are pointing to higher prices. 

Conservative investors can wait for confirmation that prices have broken out of that trading range. Aggressive investors can prepare for an upside breakout that appears to be imminent. 

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