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Bollinger Bands contracting signals the next big move?

The jobs data last Friday hints the Federal Reserve may achieve its elusive soft landing for the US economy. It was another positive trading session on Monday ahead of the November 2023 Consumer Price Index on Tuesday and the central bank’s last policy meeting this year on Wednesday. The two events, especially the Fed’s interest rate decision, can set the tone for trading into year-end and next year.


The US stock market continues to outperform in 2023, with the large-cap SPX Index gaining over 20% this year, and the technology-laden COMPQ and NDX rallying over 38% since the start of the year. Treasury yields rallied to multi-year highs before retreating in the past month.


Investors expect the Fed to hold rates steady when they meet on Wednesday, and many believe the Fed will achieve a soft landing as it starts to lower rates in 2024.


But will stocks continue with their explosive rallies?


Stocks may be poised for a big move soon as three popular indexes (SPX, COMPQ, and NDX) have contracted sharply in the past few weeks. The narrowing or pinching of the Bollinger bands means volatility is low, signaling a potential for an explosive move. A band breakout can help confirm the start of the new move.


Also, the VIX Index (12.63) continues to decline from its late October 2023 highs (23.08) as it heads toward its 4-year lows (10-11.5), suggesting less put option buying and more call buying activities. Interestingly, the Bollinger Bands for other indexes, including INDU, NYA, MID, and SML, show no signs of contracting as they remain far apart.


Does the above indicate that not all markets and stocks will perform well, with winners and losers coming from different sectors and individual names?


The 10-year US Treasury yields (TNX) rallied to 5% in October before pulling back. Although rates may come down further on a near-to-medium term basis, TNX remains in a structural bull trend, as evidenced by TNX breaking out above 3.0-3.25% last June 2022, signaling rates will be higher and longer over time.


Will rising interest rates, persistent inflationary pressures, and geopolitical uncertainties set the stage for a structural sideway trading range stock market similar in scope to the 2000-2013 stock market?


Will investors remain sector and stock-selective under this market environment, only focusing on sectors and names that show sustainable growth or offer significant value?


An unequal and fragmented stock market environment can offer opportunities for disciplined investors who adhere to risk management and are market/sector/stock selective.


Enclosed is the daily Bollinger bands study for the SPX Index (SPX – 4,622.44).


Will a convincing move above the top of the Bollinger bands confirm a breakout and the next sustainable bull rally?


A breakout above 4,607-4,637 (Jul 2023 highs and the top of the Bollinger bands) suggests a retest of the Jan 2022 all-time highs (4,818.62) and above 5,110 (breakout projection).


Or will repeated failures to clear the top of the Bollinger bands warn of consolidation?


Initial support is 4,541-4,547.5 (9/1/23 high, 12/6/23 negative outside day low, and middle of the Bollinger bands) and below 4,421-4,459 (11/14/23 gap-up and the bottom of the Bollinger bands), and 4,374-4,393.5 (extension of the Jul 2023 downtrend breakout, early Nov 2023 breakout, and the 50-day ma). The 200-day ma (4,303) remains pivotal support. Violation warns of a deeper correction.


Source: Chart courtesy of StockCharts.com


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