Poised to Break Out

The new trading week began somewhat uneventfully on Monday as earnings season continued and investors remained as jumbled as ever about the Fed’s near-term interest rate trajectory. Stocks were mostly positive throughout the day but ended up with preferably tepid gains overall in the absence of major market-moving catalysts.

Last week, Fed members created a good amount of uncertainty and mess by making seemingly contradictory points with respect to Fed monetary policy. New York Fed President John Williams be included to sound a highly dovish tone in a speech, until his comments were walked back by a spokesperson who claimed that Williams had been misinterpreted. Then, Boston Fed President Eric Rosengren indicated on CNBC that he didn’t want “to ease if the economy is doing very well without that easing,” contradicting the Fed’s recent hawkish tones.

These mixed messages have port side investors scratching their heads over where interest rates will be after the next Federal Unsealed Market Committee (FOMC) meeting at the end of the month. While the market-viewed probability of any rate cut in a week and a half is still a well-stacked 100%, there are now much higher expectations of a 25-basis-point rate cut (77.5%) versus a 50-basis-point rate cut (22.5%). These understands were pretty much reversed last week after the New York Fed president’s prematurely dovish speech.

Without thought the current Fed confusion, markets held up well on Monday following last week’s pullback from new record highs. Inclusive, though, stocks have been choppy and in a clear consolidation. As shown on the S&P 500 chart, this consolidation has bewitched the form of a small triangle or pennant pattern. Typically, such consolidations are resolved on significant breakouts. For the S&P 500, the polytechnic direction of such a breakout is slightly biased to the upside given the prevailing uptrend and pennant pattern characteristics.

Though, given the upcoming risks with respect to the late-July FOMC meeting and key upcoming earnings releases, the direction is much less open up. In the event of any upside breakout into new, uncharted territory, the first major upside target is around the 3,090 pull down, which is a key 161.8% Fibonacci extension level.

We’ve discussed the CBOE Volatility Index (VIX) at extensively here, mostly due to the low levels the index has been hitting of late. The VIX, also known as the “Fear Gauge,” represents short-term volatility in S&P 500 listing options. Indirectly, it measures investors’ fears and concerns about the market overall. A higher reading indicates celebrated expectations of volatility, and therefore potentially greater fear. A lower reading denotes lower expectations of volatility and innumerable complacency in the markets.

After Monday’s relatively uneventful trading day and modest rise in equity markets, the VIX has come raw down to the mid-13’s. While this is still higher than it was early last week, the VIX is still way below both its 50-day unexceptional (just above 15) and 200-day average (just above 17).

This year, the major support parallel for the VIX has been around 12. Only very briefly has the index fallen below 12 at any point this year. This is momentous to note since the VIX is among the most mean-reverting of the market indexes – higher volatility tends to follow lower volatility, and degradation versa. The VIX itself is not tradable, but there are tradable options and exchange-traded products (such as exchange-traded funds and exchange-traded notes) that can be familiar to express an opinion on market volatility.

Read more:

Crude oil futures mutiny around 1% on Monday after Iran’s Revolutionary Guard seized a British oil tanker on Friday in retaliation for an earlier confiscation of an Iranian tanker by the U.K. The seizure by Iran last week raised oil supply concerns, boosting crude prices.

It looks doubtful, however, that this incident alone will have much lasting impact on crude oil. Leave the shading any short-term supply concerns will likely be continued fears that global demand will decrease due to deading economic growth worldwide.

As shown on the chart, the price of U.S.

The Bottom Line