It was the trader’s choice yesterday. Did the market rally on the Fed’s decision to slow the monetary easing process? Has the battle against inflation finally begun? Or was the market cheering the blow to American Marxism and Communism as the result of Tuesday’s election results? Either way, the market looks both parabolic and climactic. We can ride it. But the liquidation break, when it comes, could be swift and unpleasant.
As measured by the Russell 2000 (IWM), small caps did, indeed, break out on decent volume. If the opportunity presents, buy the retest. Buy any pullback. Target double the 9-month trading range. The ISM manufacturing report came out strong yesterday – and we have the employment report tomorrow. But the risk-on nature of what a breakout in small caps represents is undeniable.
The measured move projected from the past several months S&P 500 trading range (September peak to October low) and the top of the old weekly channel give the S&P 500 an upside target of 4800. I would get off the escalator there, though it is hard to believe it will be a straight shot to the target. As I had suspected yesterday, the failure of the rising wedge to break lower was a WWSHD contrary signal.
Overnight traders were unable to press the downside much, if any. This leaves overnight inventory net long, but we are slated to gap open, if ever so slightly. Small gaps usually fill, and there could be some profit-taking on the overnight inventory at the open. Gap Rules are in play, but I could argue Spike Rules as well.
Use the overnight high at 4662.50 as the gateway to continue the blow-off rally, with the next roundie at 4700 as the near-term target. 4650 is the price to hold. Acceptance below that level on the hourly chart could spoil the fun.
I had some emergency travel arise yesterday, so I will continue to work on a macro presentation once I am settled in today.
A.F. Thornton