We have been in a trading paradise for the last week or so. Yesterday was a classic example of Rule #1 under Gap Rules. The Gap and Go scenario morphed into a trading range, an application of Rule #2. This is a good example for your notebook. The range had a slight upward tilt and the entire day acted almost like a spike and bull channel under the Spike and Channel Rules. If you think about it, spikes and gaps are close cousins.
Gap and Go scenarios are rare when the Gap is more than 20 points. Keep that in mind.
With only one bear bar out of the first nine, you can expect the first pullback to be minor and it was. With more than 20 bars above the mean, you can usually expect the first visit to the mean to be a good long trade and it was. Even with trend lines and wedges, you were splitting hairs to trade unless you used a lot of size. It was one of those days where it paid to stay put until lunch.
Also, when the market failed to breakout above two wedges in a row, you can expect another pullback to the mean with at least three bear bars and usually a close below the mean. The market delivered almost to the letter.
Not much more happened after lunch set in other than a slight trend reversal from a lower high late in the day. At such a nice gain and touching new all-time highs, it is not unusual for some profit-taking into the close. The day completed the loop from the 40-day cycle low last Thursday. There were almost no surprises and textbook behavior for the last week, save that head-scratcher, relentless bull micro channel last Monday before the 40-day cycle dip got underway in earnest.
The issue now is that while one of our last two targets has been achieved, where does the market go unless it breaks out into a new channel above the current one? That is possible if we are about to enter a blow-off stage. But breadth continues to warn of trouble ahead.
There is only one time that the Summation Index on the S&P 500 fell below zero while the index was hitting new highs that the market survived for very long. Otherwise, the market is poised to take a big spill. But there have never been Fed cocaine-like money supplies like we have now. Incidentally, the Summation Index on the NASDAQ is even worse.
So today is a new day. Day trading is fine. Don’t forget your stops. But I remain reluctant to hold any overnight positions. Let’s see how the rest of the week goes. We are in one of the slowest trading periods of the year. Everyone is in the Hamptons – except me.
A.F. Thornton