Is this the final stand of bulls in the stock market?

Or are bears gearing up to retake control?

Internal market signals show a fierce battle – particularly in the moving averages – and if the bulls lose, the pushback could be significant.

Stock market moving averages show price ‘battle’

Key internal levels in this shifty market revolve around the weekly 200-day simple moving average (SMA) and the monthly 50-day SMA that stretch from the pandemic lows of 2020 to the most recent high price levels on the indexes.

The bulls and bears continue to “battle” for price levels at the 200-day SMA on stock market indexes.

“This is to be expected as it is the final stronghold of the bulls,” according to Sam Shames, Vice President of Options at Simpler Trading. “When they lose this line in the sand they will be pushed back, so it is imperative for them to defend these levels.”

In this environment Sam cautions traders to be aware of the impact of these key levels combined with a lack of structure and momentum in the market. Unexpected news or “Fed speak” from monetary agencies such as the Federal Reserve (Fed) could influence market movement.

“Because of these dynamics, and what it would mean if bulls lost these levels, the bulls will be forced to show their hand and fight,” Sam said. “Doesn’t mean it will work, but these are critical levels on multiple markets at once.”

He is especially watching the S&P 500 (SPX) for a dangerous pattern of breaking below the monthly 21-day exponential moving average (EMA), popping back to test that level, failing the retest, and then making a lower close. This last time Sam observed this pattern was in 2008, and this indicates very bearish momentum in the market.

Internal signals, Sam pointed out, remain “absolutely terrible” as of Friday with only 12% of S&P 500 stocks above their 50-day SMA.

“This continues to imply exactly what we have been noting – there is no rotation under this market, so everything will go green or red as a block. This is bearish.”

Despite the rally today, Sam is sticking to lower targets in the indexes, including down to 3,400 on the SPX. He will revise this if the market shows changes in internal signals.

As an example of his reasoning, Sam pointed to the Communication Services Select Sector SPDR Fund (XLC) as a proxy for the overall market.

“Because XLC led the way up and broke down before other major sectors, it would imply 20% more downside which gives a target on the SPX of 2,500,” Sam said. “I don’t think that’s unrealistic, but one day at a time.”

Earnings season, inflation top trader interest

Earnings season kicks into high gear this year with third quarter numbers across all market sectors beginning to roll out.

Sam is not keen on targeting earnings trades in this uncertain environment, but is interested in how companies will project forward guidance through the end of the year. He is seeing most sectors as not showing strong possibilities ahead.

In the midst of all the earnings talk, Sam is keeping an eye on the “intervention dynamic” of the Fed which is still on track for another benchmark interest rate hike in two weeks. 

“The market will not stop panicking until the Fed panics and, at least so far, the Fed has no reason to change course until the data falls off a cliff or something somewhere else blows up,” Sam said.

Sam sees conditions continuing as a trader’s market with a high “fear” index and less volume in trading. The Volatility Index (VIX) continues to hover above 30 (anything above 20 is considered high volatility) and less volume in the market indicates a lack of conviction among traders.

“Markets overall are more illiquid than we know,” Sam said. “This dynamic cuts both ways up and down as it’s more difficult to rebalance large books with this low liquidity.”

“While the direction is still pointing lower in trend, the volume dynamics plus illiquidity will result in big moves in both directions,” Sam said. “Adjust your strategy and size for this.”

Sam remains bearish despite recent upticks and is also watching the U.S. dollar (DXY), upcoming higher interest rates, and the yield curve.