The markets continued their surprise to the upside today, with all the major indices closing significantly higher. After consolidating in a wedge yesterday, the S&P gapped up at the open above its 50 day moving average. So then off to the races from there, right?
Well, not quite. Initially, the market proceeded to work its way into yet another tight wedge formation. Great, more congestion. To see it around 12:45 PM EST, you could be forgiven for suspecting a false breakout.
That lasted until about 1:00 PM. Early in the afternoon, the floodgates open, and the markets took off. The end result was a very respectable 22 point gain on the day. Interestingly, the S&P seems to have resumed rallying at a rate roughly parallel to the trend originating from the Oct. 15 low, phase shifted forward in time (to the right on the chart) by about a day, though price confirmation for this hypothesis is as yet pending.
Stepping back for a moment, its clear that we’ve made a sound break above the 50 day, and we’ve maintained the near term momentum from the recent bottom. From a daily perspective, we’ve also maintained the sheer slope of the short term uptrend from Oct. 15th without any breaks or resets. All of these developments are unequivocally bullish.
Moreover, there are very few major zones of resistance left to slow this market down. The only level with any real significance is 2000 with its big round number effect. Moving up beyond that, new highs are all but a forgone conclusion. However, despite all the upside momentum driving the indices right now, we need to be aware of key downside levels. A move to close back below resistance-turned-support at 1967 should be seen as a signal to take profits, but again, only on a CLOSE below that level. A retest and bounce off of the 50 day from here should not be interpreted as a reason to panic.
There are plenty of reasons to expect more upside from here, and I personally favor the long side for the remainder of the week. However, that by itself might be the strongest argument for caution moving forward.