by Lance Roberts, StreetTalk Live

I know...it's frustrating.

For the last couple of months, I could have almost just alternated weekly missives. One week the markets rally from oversold lows, the next week they crash from overbought highs. Each week seems to be a mirror opposite of the week before with nothing much to show for it.

This week has been much the same. As I posted in this past Tuesday's briefing:

"Last night, during the 4pm daily broadcast, I discussed the markets and stated the market was due for a "reflex bounce" as soon as tomorrow. While the bounce in the market today is being attributed to further interventions by the Chinese government to try and forestall the bursting of the equity bubble in their market, the reality is the markets were just oversold following five straight days of selling."

"As human beings, we always need a "reason" for actions. It is just how we are wired. If we stare at a series of random dots long enough, our brain will begin to find patterns and shapes in the randomness. The same is true for the market. News headlines are used by our brains to attach a reason to the randomness of market actions. However, turn-off the media drivel and look at price action itself and a clearer picture emerges.

As shown in the chart above, the recent market "sell-off" exhausted the "sellers" in the market on a very short-term basis.

This "oversold" condition provides the catalyst necessary for a reflexive bounce in the market.

Importantly, the markets, have been able to find support at the 200-day moving average (dashed red line) which keeps the markets defined within the cyclical bullish trend. The 150-day moving average (dashed blue line), which had previously been very strong support for the bullish trend going back to December of 2012, has now been violated.

This support at the 200-day moving average keeps portfolio allocation models at, or near, fully allocated levels currently. This is because, up to this point, the longer term bullish trend has not been violated."

I have updated the chart above to show the subsequent reflex bounce that occurred through Thursday's close.

There are several very important considerations derived from the chart above with respect to current portfolio allocation models.

1. The market is confined to a fairly tight consolidation range. (More on this in a moment)
2. As expected the oversold daily condition of the market "fueled" a reflexive short-covering rally this past week. That rally has NOT yet expended all of its "fuel" as of yet leaving some moderate upside still available.
3. The market has now successfully defended the 200-day moving average three (3) times over the past two months. That is "bullish."
4. Unfortunately, the market has failed three (3) times in trying to attain new market highs. That is "bearish."
5. Lastly, and most importantly, this consolidation will NOT continue indefinitely. These consolidations in price act much like the "coiling" of a spring. The longer the consolidation process, the greater the pressure becomes on the market as the spring is wound ever tighter. Eventually, that "coiled spring" will be sprung, and the resulting movement has historically tended to be fairly sharp.

However, the problem is that currently there is "no way" to tell which way it will break. A break to the upside would likely carry the markets toward 2250-2300. A break to the downside would most likely push prices towards the October 2014 lows of 1840-1850.

7-Months & 7 Saves

While we do NOT know for sure which way the market will break, there is mounting evidence that such a break will likely be to the downside. As my friend Charles Hugh Smith penned recently:

"What's "saved" the market seven times in seven months? The usual burps of hot air: the Federal Reserve issued more mewlings (zero rates forever), Greece was "saved" again, China's crumbling stock bubble was "saved" again, and so on."

"The problem for bulls is they keep hitting their head on the ceiling after every "save": instead of running to new highs in an extension of the six-year uptrend, the S&P 500 reverses once it reaches the narrow band of recent highs.

As soon as the SPX hits this range, somebody starts selling. It's called distribution: the smart money sells to whomever is buying--bot, trader, hedge fund, it doesn't matter, as long as someone takes the shares off their hands.

This raises the question: how many more "saves" can there be? How many more times can Greece be "saved" so global markets rally? How many more times can China's imploding stock market be "saved," bailing out global markets again? How many more times can the Fed talk up zero interest rates and put off an eventual click up in rates?

History isn't especially kind to the faith that the market can be "saved" every month for years on end. China's authorities and stock market punters are learning this the hard way: when the sentiment has turned, every "save" gets sold by the smart money, and then by the "dumb" (i.e. margined) money as their hopes of new highs are shredded once again.

Can markets be saved an eighth time, a ninth time, a tenth time this year? How about next year? Another 12 months, another 12 saves? If the "saves" are going to run out, why wait to be the last sucker holding the bag when the Fed's fetid hot air fails to work its magic?"

The Bullish View

While none of this suggests that portfolio allocation models should reduce exposure to equity risk, it does NOT MEAN that such will always be the case. The deterioration in the data is confirming that risk is rising markedly.

However, here is a bullish spin on the market via a recent Fortune article:

"The important thing to remember, however, is that flat markets are not necessarily predictive of what will happen in the immediate future.

Flat markets do not necessarily suggest any particular outcome when the S&P 500 finally breaks out of its slumber. It's been down three times, flat once, and markedly higher in the other eight instances. All those narratives on what's about to happen based on the current trading range should be discounted or ignored with extreme prejudice. The most common resolution has been a gain with much less volatility than usual, but the outcomes have been all over the map."

The problem, is that there is a huge difference between a flat market, and one that has deteriorating underlying momentum. The chart below shows the S&P 500 as compared to it underlying momentum going back to the early 1980's. Every time momentum has triggered a "sell signal," as what currently exists, the market has experienced a negative outcome.

So, while the bulls remain in charge currently, after almost seven (7) years of a bullish rally the market is sending clear signals that investors should remain on "high alert."

Have a great weekend