Bulls begin to face questions about further upside

Stocks have continued to trade in a narrow range for over a month now. While there have been occasional probes to new all-time highs by the S&P 500 Index SPX, -0.14% Dow Jones Industrials DJIA, -0.18% and Nasdaq Composite COMP, -0.11% the progress has been slow. The SPX traded in a range roughly from 2160 to 2175 for the last half of July. Then new highs were registered after one strong unemployment report on Aug. 5. But there wasn’t much follow through, and the SPX has traded in a similar tight range since then, roughly from 2175 to 2190.
As the range has tightened, the actual (historical) volatility (HV) of the SPX continued to drop. The 20-day historical volatility is now down to 5%, which is an almost ridiculously low level. It is lower than almost any other market sector, including bonds, where the 20-day HV is 12%.
This tight range has also had the effect of narrowing the “modified Bollinger Bands” (mBB). These Bands are marked on the accompanying chart, and they are tightening around the still-rising 20-day moving average. We are currently on an mBB buy signal from June 24, right after the Brexit vote slammed the market for a couple of days. Those buy signals generally have an upside target of the +4-sigma Band, which is the highest Band shown on the chart. That Band is currently at 2206, and generally moving sideways.
But the most important thing about the SPX chart is that it is still in an uptrend, with the 20-day moving average continuing to rise. That is bullish. Unless it breaks support, it will remain in a positive state.




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