Stalling under old highs

S&P500 daily at 2:44 EST

Intraday Analysis

MARKET BEHAVIOR
Stocks continue consolidating under resistance at 1,850 as we trade between the 50dma and January’s highs.  If the market is entering a 6-month consolidation, we are likely near the upper end of the expected trading range.

MARKET SENTIMENT
Most feel better given the rebound to near all-time highs, but so far buyers are reluctant to continue chasing above 1,850.  Dip-buying and short-covering provided much of the lift from the 1,740 lows, but that buying frenzy is slowing as we approach old highs.  This pause is intensifying the focus on 1,850 as more people start watching this increasingly important level.  The longer we hold underneath it, the bigger deal it will become if/when we break it.  Shorts and breakout buyers are watching this level with interest and moving above it will lead to a new surge of buying, but that will likely be the last round of buying.  Reaching new highs means most of the shorts have already been squeezed and breaking above prior resistance will tempt the last of the hesitant momentum buyers.  Once we reach 1,860, we will largely have exhausted demand from short-covering, dip-buying, breakout-buying, and value-investing.  At that point we need to find a new crop of money to continue pushing us higher.

TRADING OPPORTUNITIES
Expected Outcome:  Nearing upper end of extended trading range
While the near-term momentum is higher and we will see another wave of buying if we break 1,850, no one should expect another 100-point run over the next few weeks.  The best profit opportunities come to those who are willing to take the biggest perceived risks by buying when everyone else is panicking.  Buying the market here is more risky and has less upside, making this a better place to sell than buy.

Alternate Outcome:
The market experienced a fair amount of churn during the 5% pullback.  Chasing off the weak and replacing them with confident owners makes it far easier for the market to continue higher.  Confident owners don’t sell and when no one wants to sell, prices keep marching higher.

Trading Plan:
Buy weakness and sell strength.  As we approach old highs, spend more time thinking about locking-in profits than making new buys.

Plan your trade; trade your plan