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Midweek Market Trend for October 17, 2018

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When volatility picks up in the market, especially on the downside, I often look for short-term opportunities by following the VIX. Specifically, I look for a spike in the VIX above the upper Bollinger Band®, which means the “fear gauge” has moved more than two standard deviations from its average price over the last twenty days. While it is extremely difficult to predict when the VIX will spike, it is much easier to see when it starts reverting to the mean, which I define as a close back below the upper Bollinger Band®. As seen in Figure 1, this signal has often led to very short-term tradable bottoms. Do keep in mind though, that past performance is never a guarantee of future results.

Figure 1

Source: StreetSmart Edge®

Looking longer term, the next hurdle for the S&P 500 (SPX) is the resistance area formed by the series of previous highs around 2800 which is currently (Tuesday October 16 1:30 PM Eastern) being tested (Figure 2). Above that level looms the 100-day moving average, which acted as resistance in April and support at the end of June.

Figure 2

Source: StreetSmart Edge®

One slight negative for the market is that the breadth is lagging a bit. Notice in Figure 3 that while the SPX is above its 200-day moving average, the equal weighted S&P 500 (SPW) is not.

Figure 3

Source: StreetSmart Edge®

Turning to sector action, healthcare, which is the only sector the Schwab Center for Financial Research has as outperform, pulled back and held its 100-day moving average and looks like it could go higher (Figure 4).

Figure 4

Source: StreetSmart Edge®

One potential negative for the market is the poor action in the financials. After the new sector alignment, the financials make up about 13% of SPX, coming in third after information technology and healthcare. A warning on Friday from PNC Bank about decreasing loan demand has put pressure on the sector. Look to see if the group can hold its recent lows (Figure 5).

Figure 5

Source: StreetSmart Edge®

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

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Past performance is no indication (or "guarantee") of future results.

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