AM: Modest gains

S&P500 daily at 1:32 EST

AM Update

MARKET BEHAVIOR

Stocks are up modestly after yesterday’s monster rally.  The market is digesting that 65-point gain and neither side is making an aggressive move this morning.  We are just a hair above the 1460 level that was resistance for last Fall’s rally.  A move above 1465 could trigger a wave of breakout buying and another round of short-covering.

MARKET SENTIMENT

Looking back at the charts, there are many examples of large two-day moves, but the one thing to note is most of them gave back the second day’s gain before resuming the trend higher; the proverbial two-steps forward, one-step back.  If this happens again, we should expect to fill the gap and retest ~1425 before continuing higher.

Markets decline for one of two reasons, aggressive selling or lack of buying.  As far as this market came, many buyers are reluctant to buy up here and are waiting for a pullback.  This lack of demand will pressure prices.  Of course this is a double-edged sword because many of these reluctant buyers can also fuel a push higher.  If the market doesn’t pullback like expected, these reluctant buyers will be forced to chase prices even higher or risk being left behind.  And the third outcome is a little bit of both, continue higher to suck the last of the chasers before pulling back.

TRADING OPPORTUNITIES

Expected Outcome:
Yesterday’s gap up wasn’t as painful for bears as a steady rally that demoralizes them by a thousand paper-cuts   With a gap, there is no watching in dread as the market marches relentlessly against their position, eating their account minute by minute until they can’t stand the pain any longer.  Shorts woke up yesterday and were already so far under water the only thing to do is hope and pray for a pullback.  And the flat trade since the gap allowed many shorts to continue hanging on.  Look for a pullback to 1425, but expect another short-squeeze higher first.

Alternate Outcome:
With everyone calling for a pullback, it might not happen.  This bull could continue rallying on a steady diet of bears and pessimists.  Obviously the pace of the rally cannot continue and we will need to digest some of these gains, but if the market holds up for several days without turning lower, expect the market to continue higher.

INDIVIDUAL STOCKS

AAPL is pulling back modestly this morning after the big gains over the last two trading days.  This is constructive and supportive of the recent rally and $500 base.  It won’t be an easy hold, but patience will be rewarded in coming months as AAPL regains the 200dma and pushes toward $650.

Stay safe