AM: Holding recent gains

S&P500 daily at 3:01 EDT

AM Update

MARKET BEHAVIOR
Stock cling to recent gains and by early afternoon are on pace for their eighth consecutive up-day.

MARKET SENTIMENT
While gains the last couple days are trivially small, they are insightful.  Everyone knows the market came a long way over a short period of time.  Paranoid holders are taking profits and aggressive bears shorting in anticipation of the inevitable pullback from too-far, too-fast.  But where is this pullback?  Without a doubt profit-takers and shorts are leaning into this market, but their selling cannot dent the rebound.  If their selling doesn’t stop the market, what happens when profit-taking tapers off in coming days?

Stocks run up for one of two reasons, insatiable demand or reluctant sellers.  Holding recent levels shows many are comfortable owning stock and not rushing for the exits.  Greed and complacency, or confidence and optimism, it doesn’t matter what people call it, the fundamental nature of markets dictates prices do not fall when supply is tight.  As long as most holders keep holding, expect the rebound to continue.

TRADING OPPORTUNITIES
Expected Outcome:
Recent support suggests a continuation, not a pullback.  Maybe it only goes higher for a couple of days, but at this point it is better to own stocks and is a bad place to be caught short.  Three-days at these levels is encouraging and suggestive, but the fourth-day is usually the lynchpin because most of the profit taking and short selling has come and gone.  Once that weight is lifted, the rally resumes, humiliating the too-far, too-fast crowd.

Alternate Outcome:
It is well within the realm of possibility we pullback to the 50dma after such a strong run.  Consolidation is an important part of moving forward and chasing high markets is a dangerous game.  Violate near-term support at 1675 and things get interesting.

Trading Plan:
Shorts should  bail out early because higher prices are likely in coming days.  Unsustainable demand exhausts itself quickly and holding recent gains shows the short trade is not working.  Whenever something doesn’t go as planned, that is our cheap get out of jail card.  The worst is trade letting small losses compound before the pain finally forces us out.  If we fail to hold 1675 through tomorrow, the short trade starts looking interesting again, but wait for that signal first.

Bulls can buy back in or start adding to their positions later today or tomorrow if we continue holding 1675.  A trailing stop under this level will keep us out of trouble if the market rolls over.

Plan your trade; trade your plan