Why the breakout is already struggling

Free After-Hours Analysis: 

The S&P 500 added 0.2% on Monday, notching yet another record close.

As good as that sounds, the intraday price action was fairly disappointing. The index was up over 0.5% in the first hour of trade before a wave of profit-taking knocked it off of those initial highs.

As regular readers know, it’s not how we start but how we finish that matters most. And by that standard, Monday was not a good day. Rather than trigger another short-squeeze and wave of follow-on buying, supply dried up and prices slid from those early highs.

It is way too premature to call Monday morning’s highs a top, but the lack of follow-on buying is a concern. But none of this surprised readers. As I wrote last week, even with Friday’s breakout to new highs, the market was still stuck in a sideways consolidation:

Just because the market broke out of an ultra-tight, 100-point trading range doesn’t mean the recent consolidation is over. Stocks spend 60% of their time chopping sideways, so the odds are good Friday’s breakout was nothing more than a somewhat wider continuation of the recent sideways chop.

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Well, here we are, one session later, and Friday’s breakout is already stumbling.

As I wrote last week, Friday’s breakout was expected and very tradable, but rather than get greedy and hold for more, nimble swing traders are already locking in profits and getting ready for the next trade.

We are only in this to make money, and that means selling our winners before we want to. If we don’t, the temptation to hold too long takes over and we watch all of our profits escape. Who hasn’t done this before? Just ask all of the bears that were sitting on nice short profits less than a week ago.

As for what comes next, I haven’t seen anything that suggests we are breaking out of the recent consolidation. And Monday’s lethargic follow-on buying confirms that muted outlook. I’m not calling for a crash or anything like that, just that we need to keep our expectations in check and take our profits early and often. In markets like this, profits don’t last long.

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