Index gained a few points in a rather quiet session. Volume decreased and breadth was positive.
Index has been in overbought territory for quite some times. The fact that it has stayed there is highly suggestive of the internal strength of the move, which we have been also verifying through daily breadth observations.
It has all the hallmarks of a strong rally in its later stages. So often a good chunk of gain is made when a maturing move goes into overdrive because those caught on the other side finally give up, or those waiting for a correction to join get frustrated enough to throw caution to the wind and jump in, or, as we have discussed a few times, the always-late fund manager starts buying whatever is hot in earnest, or all of the above, and more.
No one knows how far it goes, but, by now, many have realized that all those easy shorts are not so easy any longer, and when the recognition happens, a move is usually getting due for a breather, if not a more serious correction
That is not to say that one has to hit the fire sale button, but that one needs to be watchful of the situation.
Since the mini correction of March 30, the short term wave structure has become impulsive again.
Despite the rally, volatility has stayed in lofty areas
VIX has been in a tight range for months. The resolution of this range may set the stage for the next move. A break above may signal that correction is finally happening, a break below may indicate that even if we correct, it may not be very deep.
But, do you remember how so many bears waited for capitualion because VIX never spiked? In the same manner, market may rally without VIX giving up much. Pay attention to price, moemntum and breadth. Everything else is complementary at best.
Let’s look at another breadth chart that I showed you these past days
Volume and price together, that’s the way we want it, n’est pa?
There are 4 main stages to market action: Distribution, Mark Down, Accumulation, Mark up. Others have introduced intermediary phases like Bottoming or Topping. But let’s keep it simple here, and you want to learn more you can search the internet for market phases or stages and find out more.
If the 666 low of March was the beginning of a sustained rally lasting many weeks, if not months, then this is the accumulation phase as stocks are bought by those who thinks they are cheap enough.
Eventually, some start selling and booking really good profits amassed in a very short time. That is when we get to see of how much substance the rally was really made. It may take weeks for this to peter out, or days, it may take weeks for the ensuing pullback to halt, or days, no one knows, not the bearish economist on TV, not the bubble-crook-in-chief-creamer, not the blogger next door, and not me. Well, maybe some very few well connected entities know things ahead of the rest of us, but if you are reading this, you live in the same world as I do.
The key is to be patient, observant, objective, and flexible to change. I play probabilities, and right now, they are favouring the bulls. Still, I think the bullish side, at this very moment, is suitable for either those with positions established from lower levels, or well-capitalized stock pickers working on pilot positions with wide stops, or disciplined, unemotional traders.
Nothing is guaranteed as we should very well know. This might have been a lightning of turbulent skies, a momentary flash of light and power.
Despite my love of literature, I play the market with charts and numbers and not with metaphors and similes, charts and numbers are solidly in favor of bulls at this moment for the mid-term, and signal caution for the short term.
Short term trend is up, Mid-term trend is up. Long-term trend is down.
Have a nice weekend