The stock market consolidated yesterday and overnight after Friday’s pivot from the minor cycle we discussed. Of course, most pivot lows are retested, except in the rare case of a “V” bottom. So that is the question on the table before Friday’s weekly/monthly options expiration, which has tended to be somewhat of a mid-month magnet for the monthly stock market low. Are we going to retest, and will the retest be successful?
Assisting the consolidation have been some weak bond auctions Friday and yesterday. Rates have pushed higher, along with Gold and the U.S. Dollar. Gold rising makes less sense than the U.S. Dollar rising on the heels of higher rates. Weak bond auctions could be the headwinds holding stocks back a few days. Some of the behavior hints at risk aversion, so we need to be careful.
But the Commitment of Traders report on the futures market also shows a large crowd short the bond market and betting on higher rates. I always get nervous when the crowd is lopsided in either direction because the crowd generally turns out to be wrong. We could get a significant drop in rates if everyone goes to cover their short positions simultaneously.
On top of that, consumer and small business confidence have crashed. Apparently, the rest of the country outside the D.C. bubble is not celebrating the new administration’s policies and results. Go figure? But the crash in confidence is not good for the economy or stock market. A slowing economy also could mean lower interest rates. But then there is that stubborn pattern pointing to higher rates. What is a trader to do?
Swing traders should remain in cash here unless or until we get a more significant pullback or some other confirmation that another leg higher is truly at hand. Reward and risk are lopsided. A double top remains on the table, and even if a new high is at hand, I have a hard time seeing a target any higher than 4740. There is nothing like buying the peak as a swing trader.
Day traders have a better chance at these levels either way. Our overnight cousins were unable to test either end of yesterday’s range. As I had suspected, 4667 was the line in the sand in Monday’s session, and it held. So I have more confidence today in emphasizing that 4667 is more critical than ever to maintaining the very short-term bullish case.
Dropping through the 4667 level would be a nice short if there is enough time left on the clock today. Tee up the trade if we take out the overnight low at 4671. An excellent first target would be Friday’s halfback at 4664.50, then Friday’s low at 4645. Remember that any time you are trading around a half roundie like 4650, it may override any other influence and provide support.
If the market can get above the overnight high at 4687, a long trade might make sense using the cluster of POCs around 4680 as your support and stop. Then you could target yesterday’s high at 4693, moving up the food chain to Thursday, Wednesday, and finally Tuesday’s highs until traders conquer the all-time high around 4712.50. 4740 then becomes your final destination. Keep in mind that if the buyers step in, the market is likely to blow through these upper levels fairly quickly as it moves into the new high territory. Also, 4700 is a roundie and like half-roundies, these numbers provide support and resistance in addition to anything else in the neighborhood.
The trick to all of this is that the market often reverses course from its initial path. It is coming through these levels from the opposite direction, especially on a morning reversal, that conjures the best trade. An excellent way to start is to mark the open on your chart. After the market reverses and comes back through the open, look to trade in that new direction with the parameters above.
Also, never forget to mark your opening range (after the first reversal). Project the range (measured move) in both directions and look for the breach to the appropriate target. Often the level will coincide with one of the critical levels identified above.
Yesterday was a perfect example. When the market breached the opening range, it made the measured move, also the 4667 level that I had already identified pre-market.
In a balancing market, the best trades come later rather than earlier. The tone of the overnight session is balanced – and that likely sets a similar tone for the morning.
So that is how we make sausage around here. Good luck today.
A.F. Thornton