It has almost became clich but once again its true.
The S&P 500 is at a key technical level that investors will want to watch carefully going into Tuesdays trading session. Some technical setups occur long before they become critical. Wedge patterns, for example, set themselves up long before the break out or break down takes place.
This setup will likely resolve itself within a few days and thats the problem with this pattern. It can set up rapidlywithout anybody noticing. Yesterday, S&P reached an intraday high of 1,596.65 before closing at 1,593.61. Thats a fraction higher than the April 11 all-time high of 1,593.37.
***See chart below.***
That is the often-bearish double top pattern. Looking at the circles in the chart above, we can clearly see the double top.
First, lets look at what happened when the first top was printed on April 11. When the S&P ran out of steam on that day, sellers moved in and knocked the index down 3.2 percent to its 50 day moving average.
After it found support, buyers once again stepped in and pushed the stock back up to what was now a resistance level1,593.
What does all of this tell us?
The market may move sideways until the ISM Manufacturing Report hits the market Wednesday morning. After that the ADP jobs numbers come out on Thursday, and the monthly jobs report on Friday.
All of this data will almost certainly cause the market to break through resistance or fail causing another pullback. As the market moves higher, these reports are under more pressure to impress. Thats becoming increasingly difficult.
This is a mousetrap market. The trap is set and it will only take the smallest pressure to set it off. It could rocket higher or plunge lower but its not likely to be a small moveespecially if Tuesdays trading session is a sideways day.
What should you do?
When the market comes to a point like this, take off your red cape and dont try to be a hero. This is a market where hedging is necessary. Consider protecting your longs by purchasing some SPDR S&P 500 (NYSE:SPY) put options. Theyre ultra-cheap right now and will lower your exposure to a market selloff.
This market is still in bull rally mode making a sell off a likely buying opportunity rather than an adverse technical event. The key level is 1,551. Providing the S&P holds that level, no technical damage will occur.
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