Central banks support market, new highs likely

As world banks signal their readiness to support their domestic economies, now is the time for traders to take advantage of market strength, or risk missing out on the upside, according to Randy Frederick, managing director of active trading and derivatives at Charles Schwab.

Although actions by the Federal Reserve, European Central Bank and Peoples Bank of China have all lessened downside risks in the market, retail participation remains low, with August volumes measured at 15 million contracts a day.

The upward trend should also ease fears of a “death cross” scenario, which was threatened in July when the SPX’s 50-month simple moving average (SMA) came within 16 points of the 200-month SMA. According to Frederick, the lines are now diverging and the SPX is following an up trending channel (see SPX chart below).

 

Frederick believes the summer correction is over, as, on June 4, the SPX approached the bottom of a “red zone” set at 1257-1342. In fact, he believes the SPX could hit a year-long high of 1419 as soon as this month, although not before a 2-3% correction.

Finally, although the low VIX is likely undervaluing market risk, it is slightly bullish for both the near-term and long-term, Frederick says (see VIX chart).

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