Pre-Market Outlook – 5/3/2021

I encourage you to review the View from the Top published last night for an intermediate market perspective. As you will recall, we have been dealing with a balance range in the market (S&P 500) bounded at the bottom by 4166 and the top at 4193. In fact, it is a consolidation that dates back the April 19th peak.

Last Thursday, we had a “Look Above and Fail” per the Balance Rules. Taking that as a cue that the market was ready to roll over, traders took the price down to the bottom of the balance range on Friday, where the shorts piled in, spiking the put/call ratio to a level nearly as high as the fear the ratio expressed at the recent March lows. 

Yet, no new sellers emerged and the market successfully defended the lower boundary. Now those shorts are trapped with bad location. I feel bad for these traders, but the fact that the market held the boundary low is a bullish, contrary indicator (WWSHD – when what should happen doesn’t}.

As I had suspected and written here Friday, these traders now need to buy to cover their shorts. We have already seen this manifested in Globex last night, and price has managed to move back slightly above the balance range, but still below Thursday’s fake-out and Friday’s highs.

So this morning, we will open with a true gap higher, and gap rules technically are in play. As with any true gap, assume there is potential for fade with the caveat that we are opening within a larger balance area (with the fake-out high) which may mute some of the shock and awe. I would shy away from any gap fill setup that is not opening out of range.

So a breakout above Thursday’s all-time high at 4199 is our upside reference. A break above there could take us to 4250. The bottom of the balance area at 4166 is the obvious downside reference with multiple tests at that level. A break there puts 4160.00 into play.

We have the short-covering and early month fund flows on our side today, but don’t lose sight of the lofty levels. Set a disaster stop and be on alert for liquidation breaks. I believe we are finishing the final leg of the rally before the 18-month cycle correction gets underway.

A.F. Thornton