Two Reasons the Stock Market Can Rally If Washington Shapes Up

It isn’t rocket science to argue that stocks would enjoy a relief rally if a budget was passed, the government reopened, and the debt ceiling was raised. My argument, though, is that technical conditions have emerged that may allow a near-term stock market rally to have legs. Perhaps some order in Washington would provide that spark.

stock market volatility

I base my argument on two points. The first is that the S&P 500 is at a natural place to attract buying. The index has been churning around the daily mean (20-day simple moving average) since 9/30. Keep in mind the larger context that the primary uptrend since 2009 is probably still intact: there isn’t any evidence of a major top forming, and a series of higher highs and higher lows is in place. In an uptrend, the mean represents a natural place for buyers to step in following a short-term setback.

In addition, so far SPX has respected a demand zone at 1698.8-1679.6 based on the topping activity in July-August and the May high. Past areas of congestion often influence buying and selling decisions.

stock market rally analysis

My second point is that volatility has spiked to a level that has been followed by buying at almost every instance in 2013. The CBOE Market Volatility Index (VIX) is known as the fear gauge because spikes occur when premiums on S&P 500 put options jump sharply due to increased buying by those seeking to hedge long stock positions. The VIX eclipsed 17.80 in February and April, each time beautifully signaling a bottom in SPX. Two signals in June were early. Another spike later the same month came two days before a bottom. The 8/30 signal was timely. And now we have three readings above 17.80 since last Thursday. The coincidence of these readings with SPX reverting to the daily mean sets an excellent foundation for a rush back into stocks, again, if the paralysis in Washington can be resolved.

vix volatility index analysis_october

Overall, while I think stocks are a great place to be in the long term, I don’t think this is the right time to be aggressively adding to long positions. In fact, my last post here on See It Market was about reducing long exposure. And I covered something similar referencing Dow history on TraderPlanet recently. Moving down to a shorter time frame, swing traders need to be ready to act because if the news flow improves and elicits a stock market rally, it’ll probably have legs. I hope this was of some insight to you. Good trading to everyone.

Twitter:  @ChrisBurbaCMT

Chart Source:  TradeStation

No position in any of the securities mentioned at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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