Germany Boosts U.S. Stocks
The market slowly moved higher yesterday. The indices actually started deep in the red. But a midmorning ride down to 1197 stabilized SPX and it rose from there to eventually hit 1220 resistance by late afternoon.
The SPX slid nearly a percent after it tagged 1220 resistance, and the decline occurred in about five minutes. While the bulls were not able to overcome 1220 yesterday, they likely established 1197 as a support zone again following the morning bounce.
Yesterday marked the third straight day of gains. And SPX is up 9% from last week's low of 1121. The indices are a tad overbought in the short term, but yesterday's morning decline helped a great deal to alleviate the extreme technical conditions.
I think a lot of investors are waking up to the fact that the market was extremely oversold a few weeks ago. And that the decline in early August was uncalled for. The market lost 15% in a week and SPX fell all the way to 1100 from 1350 in early July.
Investors have begun to realize that great companies tumbled for really no reason. Additionally, short interest increased dramatically as permabears took aggressive positions. The combination of value investors and short squeezes over the past week stabilized the market and now took SPX past 1197 resistance.
Between 1220 and 1250 there is not much resistance. If SPX is able to take out 1220 it could be a fast ride to 1250, maybe briefly higher to 1260 or something.
But as I mentioned in great detail yesterday, that for a variety of reasons I find it hard to believe that the wounds inflicted by the bears earlier this month have fully healed. And I do not think the market is ready to blast beyond 1250.
In the TradeMaster weekend videos I have biased the trade setups to the long side for the past four weekends. While I've favored the bulls for most of August, the speed at which the market recovered happened faster than I thought. And I still encourage new subscribers or those in cash to watch the weekend videos, and add long exposure. But if you have long positions already, like us, it's very important to keep stops tight.
I don't want to sell anything outright because I think the market should continue higher. But as I've mentioned before, the 1250 resistance zone should be staunch resistance and I would expect the indices to consolidate or retreat as SPX approaches that resistance zone.
Accordingly, keep your stop losses tight. By using stops as opposed to selling outright you can take advantage of rises in the market. Additionally, be prepared to start taking short, or inverse etf, positions as SPX hits 1250. It's a risky trade to go short, you are fighting a bullish trend, but barring government intervention of some sort, I don't see how buyers muscle through 1250 SPX on their first try.
A final strategy that you can use when you are positioned long, but you think the market might turn soon is to formulate limit sell orders. A limit sell order will only execute once your stock has hit a designated price. So, take a look at each of your open trades and ask yourself where you would be happy to close each particular trade. Then set a limit order to sell certain positions at slightly higher price.
The bulls will have help taking out 1220 resistance from the Asian indices which were higher today. Additionally, Europe trades with over 1% gains and no losses this morning after the cabinet of Germany's Angela Merkel approved the expansion of the euro zone's bailout fund. Additionally euro zone inflation held steady at 2.5% in August, which is still higher than the stated 2% goal.
While the international players will help the U.S. market today, the U.S. ADP private jobs report was not nearly as friendly. The ADP reported that 91,000 private jobs were added in August, but that is shy of the 100,000 expected. I don't think the miss is too big of a deal and investors may pick up the "less jobs means more free money" mantra.
The indices continued higher although I'm not total convinced they can hold those gains. We will keep our two longs in the TradeMaster portfolio, but early this morning our portfolio added short for what I think will be a rangebound market.
