My Indicators Are Telling Me Risks Are High In The Market Right Now…

Earlier this week, I discussed seasonals for June, one of the weakest months of the year. We are just a few days into the month, but the seasonals have been accurate so far. This indicator points to a possible peak on Thursday as the chart of the SPDR S&P 500 ETF (NYSE: SPY) below shows.

Why Thursday Is So Important

As I noted in my previous piece, seasonals should not be the sole reason to take action in the market. But they coincide with another interesting factor that traders should be watching — inflation.

Before the open on Thursday, the Bureau of Labor Statistics will issue its monthly report on the consumer price index (CPI), which measures inflation by taking the price of a basket of consumer goods and services and then comparing it to previous prices. Inflation was up 4.2% compared to a year ago in April. Analysts expect inflation to be up 4.6% compared to May 2020. They expect core CPI (which excludes food and energy) to be up about 3.5% compared to May 2020. That would be substantially higher than the 3.0% rate reported a month ago.

Traders should also never take action based solely on economic data. However, the alignment of seasonals and economic news should be considered. If a decline is seen late in the week, traders need to understand it could be the start of a significant pullback.

The price action also suggests a significant price move is close. The dashed lines in the chart above highlight a trading range I identified a few weeks ago. Friday’s close was right at the upper limit of the trading range.

What’s Next

When prices break out of a trading range, we usually see one of two things.

The breakout could be followed by a rapid price move in the direction of the breakout. This indicates a sharp “up” move is possible.

Breakouts can also be followed by rapid reversals. This is known as a false breakout. Bullish traders buy the breakout. If prices reverse, they may panic and sell quickly.

This is important because seasonals indicate there’s a possibility of a breakout early in the week and a reversal later in the week. That’s a third factor lining up to indicate a top is possible this week.

In the next chart, my Income Trader Volatility (ITV) indicator also shows this scenario is possible. ITV (red line) is below its MA (blue line). ITV is similar to VIX in that it rises as prices fall. Its current position is bullish. But ITV is higher than it was a week ago. A continued increase in ITV would be bearish.

Our last chart this week shows my Profit Amplifier Momentum (PAM), which is also bullish.

PAM is designed as a short-term indicator. The last time PAM was this high was in March, right before a small downturn.

Closing Thoughts

While there’s not a firm answer on “up” or “down,” my indicators are pointing to an interesting week in the market. One thing they are all saying? Risk is high.

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