WR: Big gains

Weekly Review

MARKET BEHAVIOR
This was a historic week as we smashed the all-time high set back in 2007 and kept on going.  This was also the largest weekly gain since the start of the year, moving up 2.6% on light volume.

MARKET SENTIMENT
Markets typically make big moves under two conditions.  The first is after a steep selloff where traders were impulsively selling stocks by the truckload.  This leads to a capitulation bottom and the market rebounds decisively from irrationally oversold levels.  The second condition is at the tail end of long move where the last holdouts forget their reservations and finally embrace the long-established rally.  These are the last traders left to buy a rally and markets roll over shortly after on a lack of demand.

This rally is almost five-months old and to see some of the largest weekly moves in such a mature market is enough to raise suspicions.  One strong week doesn’t mean the top is in and we often see multiple strong weeks leading into a top.  Every market is different, but they are all the same.  There are parts of this rally that are unique, but after it is all done, we will look back and say I should have seen this coming because it was exactly like……..

I hope this market tops soon because normal and periodic pullbacks keep a rally sustainable.  This is the one-step back after two steps-forward.  If we jump ahead three, four, and five-steps at a time, expect a two, three, and four-step pullback.  I don’t think the market is grossly over-bought at this point and a five or ten-percent pullback would be part of finishing the year higher.  But if we go another ten-percent higher without a pullback, we will likely have a 20% correction in our future.  In a bit of irony, bulls should be rooting for a pullback and bears a strong rally higher.

TRADING OPPORTUNITIES

Expected Outcome:
The trend is higher and no matter what our biases, we have to respect that.  The market is clearly above support and the breakout remains intact until we dip under 1570.  Longs should move a trailing stop up to this level because a dip under this level in the first half of the week spells trouble for the aging rally.  On the short side, an aggressive bear could short weakness with a stop above the recent high of 1597.

This market is bound to pullback at some point.  Maybe it is this week, maybe next week, or next month.  The question isn’t if, but when.  The key to making money is figuring out the timing.  Without crystal balls, we have to watch the market and respond to the signals it sends.  Right now those are moves above 1597 and through 1570.

Alternate Outcome:
This is the rally that just won’t quit.  These things go longer than anyone expects, but fail as soon as everyone expects them to keep going.  It is really hard to say where we are.  Last week’s strength was due to the resurgence of the too-far, too-fast crowd after pushing up to all-time highs.  With those in the rearview mirror, what comes next?  Have all the pessimists given up and we can finally correct?

The biggest challenge I have is determining what conditions would get me reengaged in this rally.  Obviously I’m looking for a shakeout to refresh the uptrend, but what if the chase is just getting started?  I don’t want to stubbornly miss 100-points of upside because the market doesn’t do what I think it should.  A weakening market cannot hide its cracks, so if we don’t see weakness develop over the next few days, the next move will be higher.  Then we resume our search for cracks and another move higher.  Repeat until the market stops going higher.

Plan your trade, trade your plan