Challenging record highs

End of Day Analysis

MARKET BEHAVIOR
Stocks tested recent highs near 1,985, but failed to set a new closing high.  The last few weeks of sideways trade allowed the rapidly rising 50dma to catch up and we are now less overbought than the last time we found ourselves up here.

MARKET SENTIMENT
While we are back near the highs, market participants are far less giddy this time.  Conflict in Israel and Ukraine are keeping traders on edge, but the truth is these headlines are already old news as far as the market is concerned.  Anyone who fears these situations already sold.  Those who bought during this uncertainty showed an appetite for risk and willingness to hold the volatility.  And of course as we’ve seen in previous dips, the vast majority of owners have no interest in selling no matter what the headlines shout.  While all the talking heads try to scare us with this or that, without sellers this market will continue to defy gravity.

But that is the near-term assessment.  Over longer time frames it is hard to think of the catalyst that will drive the next bull leg higher.  Typically markets climb the proverbial wall of worry.  This is when prices are oversold as traders fear the worst.  Then there is a gradual thaw and markets rally as traders change their mind and slowly buy back in.  But we find ourselves with the opposite condition, everyone is fat, dumb, and happy.  With everyone so content, there are fewer and fewer people left to change their mind and buy in at ever higher prices.  While the momentum is clearly higher, we are on thin ice.

TRADING OPPORTUNITIES
Expected Outcome:
We are a few points from record highs and the resulting short-covering and breakout buying that will push us toward 2,000.  After that, it is anyone’s guess what comes next.  Maybe it is one last surge in a double top.  Maybe we’ll pullback modestly and continue consolidating.  Or will we surge higher and never look back?  Only time will tell as we watch to see how traders respond to the breakout.

Alternate Outcome:
Many traders expect us to hit 2,000, but often the market gives us the opposite of what the crowd expects.  Today’s failed breakout could be all we get before retesting support at 1,950.

Trading Plan:
It is too early to be short this market since it is completely ignoring bearish headlines.  No matter what people think it should do, it keeps going higher and we must respect that.  1,950 is turning into a major technical support level and breaking through that will force us to reevaluate our outlook, but until then assume the uptrend is intact and plan your trades accordingly.

Plan your trade; trade your plan.