Unbelievably, we have three unfilled gaps below us and an all-out breadth thrust coming off the October low. This is incredibly bullish for the intermediate picture. I had predicted a move back up to the old highs to establish a new trading range. But now, even I even doubt that scenario in favor of new highs. Steller earnings in several companies are likely to encourage the move. Inflation can drive stocks higher, at least initially.
The only rain on this parade is the continued increase in interest rates and the head and shoulders reversal pattern that telegraphs the 10-year rate doubling in the months ahead. The pattern and its implication seem inconceivable, but anything is possible these days.
Premarket indications tell us very little this morning. Our overnight cousins explored prices slightly above yesterday’s range, but they did not stick. There is a 45-degree line overnight on the profiles indicating that overnight sellers got nowhere. The pattern low around 4500 should be a good bull/bear line for day trading today. Also, keep in mind that the structure below us is shaky, given the rapid rise and unfilled gaps.
Accordingly, you will need to be on guard for liquidation breaks in the next few sessions. Today is a good day to follow the usual sequence. Traders are likely to take the initial drive to test either the overnight low and yesterday’s low or vice versa in the other direction. Mark the open and favor directional trades coming back through either side of it. Don’t be surprised if the market is rangebound today, favoring responsive trading. Use a VWAP with 2 standard deviation bands or a volume profile (or both) to trade it.
Your early clues will be ticks, the a/d line, and tempo: strong internals favor trends, and weak internals favor balancing. Look for the telltale clues of limit order trading, which also favors balancing. With limit order trading, you see traders selling strong bull bears and buying strong bear bars. Big bars in both directions with no follow-through indicate confusion and also lead to balancing. All of these subtleties can help you define your day trading strategy.
A.F. Thornton