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U.S. markets have been positively schizophrenic of late.
The S&P 500 has alternated between up days and down days for six straight sessions. With stocks rising 0.8% yesterday, if recent form holds we should expect another down day today.
Sure enough, stocks have gotten off to a slow start, falling 0.6% in the first half-hour of Wednesday trading.
Typically, this pattern of two steps forward, two steps back is a precursor to a major breakout. Last August, the S&P traded within the same 0.35% range for seven trading sessions and within the same 1.2% range for the better part of a month before bursting up 4.5% in early September.
The trading range hasn’t been quite as narrow this time around. Since March 8, stocks have risen as high as 1,563.77 and dipped as low as 1,545.80 – a 1.2% disparity. While it doesn’t match the 0.35% trading range we saw for seven sessions last August – the narrowest seven-day range in 84 years, at the time – it does compare to the longer period we saw for the entire month of August.
A breakout is likely coming. The only question is – which way will it go?
With stocks already at or near record highs, logic tells us that the breakout will be to the lower end. However, recent history – including last September – tells us that breakouts following narrow trading periods typically trend toward the upside.
Either way, keep your eye on the S&P. If it breaks below 1,545, we might be headed for an extended correction. If it breaks above its all-time high of 1,565 – yet another rally may be in store.