All major U.S. indices closed in the green last week, led by the small-cap Russell 2000, up 3.9%, and the tech-heavy Nasdaq 100, up 3.6%.
One of the main characteristics of the market in 2016 has been see-sawing, directionless trading with huge intraday swings. This is a relatively recent phenomenon, as seen in the chart below. The average daily trading range of the benchmark S&P 500 since the beginning of the year is 37.2 points. That is 54% higher than 2015's average daily trading range and more than double what it was in 2010.
This spike in the daily trading range, which many attribute to the combination of lower volume and an increase in high frequency trading, has made it more difficult to determine the underlying trend of the market -- but it's still possible. In this week's Market Outlook, we will take a closer look at some metrics that can help us determine the market's near- and intermediate-term direction.
All sectors of the S&P 500 posted gains last week, led by real estate and consumer discretionary. Defensive utilities and consumer staples, which ironically are the only sectors in positive territory year to date, were the weakest groups last week.
Market Still At A Near-Term Inflection Point
Financial asset prices typically move sideways when investors are collectively uncertain about upcoming market direction, which certainly appears to be the case right now. This week's first chart, one that Market Outlook readers are very familiar with, remains critical in determining near-term risk and reward in the broader market.
The S&P 500 finished last week at 1,918, which is between the October 2014 low at 1,821 and the intermediary high between two recent tests of that low (on Jan. 20 and Feb. 11) at 1,947.
A sustained rise above 1,947 to 1,954 (the 50-day moving average) is necessary to clear the way for a move to 1,993 to 2,005, which are lows made in mid-December. Conversely, if the S&P 500 cannot make it above 1,947 to 1,954 this week, it will set the stage for a third test of 1,821 support.
In other words, we are expecting either a 3% rise or a 6% drop from 1,947 in the near term.
Key Near-Term Influence: Investor Fear
Now that we have defined 1,947 as a near-term pivot point in the S&P 500, the level of investor fear -- or lack of it -- will be a key indication of the market's next move.
The next chart plots the S&P 500 and Volatility S&P 500 (VIX) with its 50-day moving average, currently situated at 21.96. I use the VIX's 50-day as a baseline to determine whether the market is fearful or complacent.
The red highlighted area shows that when the VIX was trading above its 50-day, indicating investors were fearful, it helped trigger and fuel the recent decline in the S&P 500.
The VIX ended last week at 20.53, slightly below this moving average. A sustained decline below 21.96 this week would suggest that fear has abated enough to push the S&P 500 above 1,954 resistance, clearing the way for a move to 1,993-2,005. Conversely, a sustained reversal back above 21.96 would suggest another decline and retest of S&P 500 1,821.
Key Intermediate-Term Influence: Small Caps
Since small-cap stocks, along with technology, tend to lead the broader market higher and lower, I continue to watch the weekly chart of the Russell 2000 to determine the market's intermediate-term direction.
The Russell 2000's collapse below the 2009 uptrend line in January indicates the bullish trend is no longer in force. Additionally, the bearish head-and-shoulders pattern targets a decline to 880, 13% below Friday's close.
The 2009 trendline at 1,041 is situated 3% above Friday's close and is where the index's recent rebound should fail if the trendline break is indeed the beginning of a much deeper decline.
Metals Remain Promising
In last week's report, I suggested Market Outlook readers lock in profits in the SPDR Gold Shares (NYSE: GLD) following a 15% rise in the ETF after I identified it as an emerging buying opportunity less than two months ago.
Meanwhile, in an economic environment where most commodity prices continue to decline, a number of other metals prices -- both precious and industrial -- are also starting to show some upside potential.
One of these is copper, and my interpretation of the latest data from the Commodity Futures Trading Commission (CFTC) suggests current levels represent value. This is based on the weekly Commitments of Traders (COT) report, which tracks "smart money" commercial hedgers, who use futures contracts to either hedge or embellish their physical holdings in the commodity.
The iPath Bloomberg Copper Subindex Total Return ETN (NYSE: JJC), which closely tracks copper prices, is currently negotiating its 50-day moving average at $23.61.
A sustained rise above this minor trend proxy would suggest a near-term bottom is in place at the recent lows. And I would view two closes above $24.67 this week as confirming evidence that a near-term bottom is indeed in place. If that happens, I'll look for an additional 11% advance to the 200-day moving average at $27.45.
Putting It All Together
The daily trading range in the S&P 500 has exploded so far in 2016. This is due in part to elevated investor uncertainty amid numerous mixed signals coming from the U.S. and other global economies.
The S&P 500 is at a critical minor inflection point (1,947) from which a rally to the 2,000 area or a collapse back to 1,821 is likely to begin. The outcome is at least partially dependent on the level of investor fear as indicated by the VIX.
Bigger picture, the breakdown below multiyear uptrends in a number of key global indices, including the Russell 2000, late last year warn that, minor rallies aside, the mid-2015 decline in global equity prices is not yet complete.
Finally, I continue to see the metals space offering alternative investment opportunities in what has otherwise been a poor market environment.
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This article was originally published on ProfitableTrading.com: Market Remains At A Critical Juncture... What's Next?