The Pause that Refreshes

End of Day Update:

The S&P500 produced minor gains for a second consecutive day following the impressive, 90-point rebound from the 200dma. We closed just under all-time highs as European and Chinese fears fade from memory.

This calm tells us both sides are happy with their positions and not many participants are changing their mind. Those with stock continue holding for higher prices while those with cash are not interested in chasing a “straight-up” move. That means we trade quietly until one side gives in.

The “end” of the Euro and China crises lead to a sharp recovery that humiliated bears. Their short-covering provided a material portion of the demand that pushed us back to all-time highs. But in recent days the dip buying and short-covering has slowed materially.

Powerful breakouts are built on a surge of traders climbing over each other to avoid being left behind, but that isn’t the case as we approach old highs. Even huge moves in NFLX, AAPL, and GOOGL failed to excite the broad market. Rather than accelerate, gains are slowing even though the news keeps giving us reasons to buy. This tells us demand is falling off. By itself, this is not a reason to be bearish, but it shows there is less upside pop left to this move.

Constructive price-action through Wednesday shows solid support behind these prices, but it wouldn’t be a surprise to see us dip back to 2,100 support and the 50dma. Institutional money hates buying after big moves and feel better if they can get even a modest discount. In a self-fulfilling prophecy, their lack of buying often leads to a dip. But no matter what happens in coming days, the market is poised to breakout into uncharted territory in coming weeks.

Jani