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Take a look at the price chart for the Standard and Poor’s 500 Index (SPX). The S&P 500 index hit its all-time high before the March correction at 3386 on February 19th. It recovered that high and set a new all-time high at 3581 on September 2nd. On October 12th, SPX attempted to retake that earlier September high, but only got as far as 3534. Since then SPX has been largely wandering sideways around 3450, closing today at 3465. We have support at the February high of 3386 and the 50 day moving average (dma) at 3408. Resistance will be found at the October high at 3534 and the September high of 3581. I expect SPX to continue this sideways dance until after the election. SPX closed Friday at 3465, up 12 points on the day but down 0.8% for the week. Trading volume for the S&P 500 companies continues to largely track below average, so none of the large players are venturing out very far in either direction. They are waiting for the dust to settle.

The volatility index for the S&P 500 options, VIX, rose on Monday and Tuesday, but declined for the rest of the week, with the close at 27.6% Friday being essentially unchanged for the week. These are elevated levels of volatility. Don’t make the mistake of becoming complacent.

IWM, the ETF based on the Russell 2000 group of companies, posted more bullish trading action than the larger blue cap indices. IWM’s pre-correction high was 167.59 and the close on October 12th at 163.79 was the closest IWM has come to recovering those levels. Since October 12th, IWM has effectively traded sideways, closing Friday at 163.07, less than five points below that previous high. The bullish behavior of the small to mid-cap stocks that make up the Russell 2000 index is encouraging. These are the “risk on” stocks for the market.

The NASDAQ Composite index took a large loss on Monday, but traded sideways the balance of the week, closing Friday at 11,548, down 1.6% for the week. Trading volume remains below average.

In summary, the S&P 500 index and NASDAQ Composite are trading sideways and holding price levels above their pre-correction highs and above their 50 day moving averages. The Russell 2000 companies nearly recovered their 
pre-correction highs on October 12th. Unlike the larger market indices, IWM has not declined much at all and is trading sideways within 2% of the highs set earlier this month. These small to mid-cap stocks are signaling “risk on”.

One other bullish signal comes from the candlestick analysis. When a stock or index price trades lower on the day and then recovers to close much higher, it results in a long lower candlestick shadow. That is a bullish signal because it documents the situation where the stock or index was being sold off, but then a large number of traders saw that lower price as a bargain and began a buying spurt to result in a much higher closing price for the day. The S&P 500 index, NASDAQ Composite, and Russell 2000 Index all displayed long lower candlestick shadows on both Thursday and Friday this week.

I conclude that this market has an underlying level of strong bullish support, but traders are cautious due to the uncertainty of this election. Elevated volatility levels are also warning us to be cautious. This sideways churning or treading water price pattern will continue through next week and maybe even into the following week if the election results are in doubt.

The underlying uncertainty plaguing this market will be with us at least until after the election and may last even longer. This isn’t a bad time to be largely in cash.