Pre-Market Outlook - 5/28/2021 | Archimedes Methodologies

Climbing the Wall of Worry

I thought the title best described where we are in this latest rally segment that began in early March. The froth has been off the market, and some healthy skepticism has returned. But the market seems to want to go higher for now, and the pace is less frenetic as one might expect at current levels. Three pushes define a typical rally segment, and we are in the third push.

Though largely rangebound since Monday’s nice surge, I think there is a possibility for range expansion today, at least back up to the old high on the S&P 500 around 4238. That would put a nice cap on the week (and the month as this is the last trading day with Monday’s holiday).

Regardless of any other issues at hand, always remember that the last trading day of the month can be a little tricky, as will weekly options expiration today. The reward will come next week, as the first few days of a new month are typically positive, with payroll contributions rolling into 401(k) plans. And then there is the summer rally, if we get one this year.

As you will see in the chart below, we still have the 18-month cycle to contend with sometime mid-year. We keep that in mind for context, but the landing spot is not precise enough for us to definitively trade the mark. The computer algorithms are now projecting a July 10th low, but in my experience we are more likely to see the market peaking in late July, with the correction into the more usual bottoming months in the fall (e.g. September / October).

The shorter cycles have been lengthening a bit lately, and that is not unusual. No doubt, all the proposed spending keeps the market propped up a bit. Interest rates have been behaving of late, but they will be back asserting full force soon. After all, deficits don’t matter.

Meanwhile, we are on the borderline of opening with a true gap higher (above 4211.50 would be a true gap). As such, gap rules would apply. Should the gap continue to manifest into the open, it is not so large to prevent a gap-and-go scenario – though I will be lightening up my long-term positions at 4238 (the old high) for the long weekend.

Overnight inventory is 100% long, so the initial profit-taking fade (as overnight traders take their winnings) is likely – though it appears they have already done so prior to the open. Don’t forget WWSHD – if there is no fade, that would be extra bullish. If the fade turns at yesterday’s regular session high, you can repurchase the first bar through the open or a break above the first one or five-minute bar. Just keep in mind that much above 4238 you will be fighting the market makers today – so don’t be too greedy.

Beyond the indexes, there are still many good stocks breaking out of bases and into new highs. Growth stocks and tech are seeing some resurgence, as are entertainment, travel and leisure names, but rising rates could put the kibosh on best-laid plans. Use a good stop, such as a close below the 5-EMA, to lock in your profits. We will continue to use the line on the Navigator Swing Strategy – which remains 100% invested in S&P 500 futures,

Enjoy the holiday weekend.

A.F. Thornton

Pre-Market Outlook – 5/28/2021