Undermining all the noise, there is one key question: What is the market saying?
To put it in simple words, the market is saying “we have the ability to go higher”. At least for the near-term this holds true and here’s why … As the S&P along with other indexes moved higher into mid-December (2012), there was a sudden increase in selling-momentum that began. Inadvertently, this raised some worries about whether the market (S&P 500) can maintain its 1400 level. Sure enough though, the market did just that, and mainly with the help of the fiscal cliff deal being reached, it popped higher once again; all the way from 1405 to 1460 in a matter of two days!
In a big-way, this was an “in your face” response from the market to anybody who was betting on a bearish move downwards. However, in part because of this huge pop, many traders expected to see some struggle and a potential pull-back before making new yearly highs again. The question at that point (4 days ago) was not so much, whether, we see a pull-back? But, how big will it be? So naturally, short-term traders, did not want to be stuck in a market pull-back leading up to a debt-limit headline driven market. As a result, some people (including myself), were watching the 1450 level on S&P as a key support for the short-term. Consequently, today not only shut-up any bearish scenario as of now, but more importantly, proved once again that the market is both bullish and has the ability to move higher!
The market is like a board-game, whereby, the main law behind it is that of supply/demand. In this board-game, it is very easy to get distracted by what the news is saying, what the opinions of others are, and what one “feels”. I have to admit that I got too carried away with a potential market pull-back, rather than really focusing on what the market is telling me. So I deserved this unexpected day! However, it is not so much what happens that matters, it is how you react to it! Going back to the basics of any market; in a bullish scenario, one would want to see demand outweighing supply in a healthy way, whereby, on any given pull-back, the markets supply or selling volume does not go too high and the demand or buying volume does not go too low. Has the S&P shown us that? Indeed, it has and so a higher move is the easy thing to expect! Still though, always be prepared.
The first thing to take away from this is to listen to what the market is saying and that is “we have the ability to go higher”. This is key to note because one cannot say the opposite. Meaning, the market has not shown the ability to go lower, it has ONLY shown the ability to pull-back lower! To be clear, what I mean by the ability to go lower is; the ability to break below key support levels and follow through with it. Market has not done that, but it has shown the ability to move higher AKA break key resistance levels and follow through with it.
Another take-away is; banks are leading this thing … The XLF is totally in control of this market and so it is important to constantly watch how it reacts. But overall, again, going back to the concept of listening to what the market, stock, etc. is saying; the XLF has shown us nothing but the ability to go higher as well. So the bias for XLF has to be bullish at this point as well.
Third and last take-away is be prepared, regardless of what you “feel”. I admit, I was “feeling” a pull-back on the market and should have prepared better. Although I was prepared in saying, the market (SPX) has to hold 1450, I was not so prepared in case of a break above 1470 at this point.
So in order to be prepared, what I am looking for short-term is simple:
Either, (1) an S&P 500 hold above 1450, while breaking out to new yearly-highs right away. Or (2) an S&P 500 hold above 1450, and trading in-between the 1460-1470 range before breaking out to new yearly-highs.
As long as one of the two scenarios play out, the bullish bias is intact short-term and a potential move to 1500 is possible. I do not see why the market should have a problem breaking new-highs, and therefore, I would not want to see the market pull-back to 1450 area before a break above new yearly-highs.
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