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Market Jumps To New All-time High - Don’t Chase

Posted by Pete Stolcers on April 29

Posted 9:30 AM ET – This morning the S&P 500 will make a new all-time high. Strong earnings from tech giants have vastly exceeded expectations and a dovish FOMC statement is also providing a tailwind.

Apple and Facebook knocked the cover off the ball after the close yesterday. Both companies reported incredible revenue growth and Amazon reports this afternoon. Google, Apple and Facebook have rallied after reporting earnings and Microsoft was down slightly. In general, earnings have been robust and estimates have not been exceeded by this margin in over a decade.

Major economic reports will be released next week and they should be excellent. Without the threat of Fed tightening, we are in a “sweet spot”. This morning initial jobless claims were slightly higher than expected (553,000) and GDP was in line (6.4%).

The macro backdrop doesn’t get much better. I still believe that the market will pause or dip after tech giants are done reporting earnings. If you are a swing trader, don’t chase.

Swing traders should patiently wait for a dip. In my comments I’ve mentioned that it will be hard to resist temptation and that the market is likely to get through SPY $420 this week. US 10-year Treasuries (TLT) are showing signs of strain and the chart looks like a bearish flag is forming. If interest rates start to rise the market headwinds will start blowing. The worldwide spread of the virus will impede the global economic recovery. I’m not looking for a big market pullback, just a normal round of profit-taking after a big rally. The problem with selling out of the money bullish put spreads right now is that option implied volatilities are extremely low. That means we have to go close to the money to get a credit and any market speed bump will instantly send these stocks below the short strike price. A market dip will provide a better entry point and option implied volatilities will rise. Furthermore, we can gauge relative strength during the market drop and that will help us identify the best stocks. If you are a longer-term investor, stay long. For swing traders who have a 3 to 4 week time horizon it is best to stay sidelined.

Day traders should watch the early price action. Gap and go formations are uncommon at an all-time high. However, we do have fantastic news across multiple fronts. If the market is able to grind higher in the first 30 minutes buy passively. If the market compresses for the first 30 minutes it means that the bid is strong. The early gains will have weathered profit taking and the market will break out to the upside. You can get more aggressive with this pattern because you are not chasing. If the market pulls back during the first 30 minutes with a new low for the day you should wait for support. This would be the best case scenario since you will be able to identify stocks with relative strength during the market drop. Once the market finds support, aggressively get long. There is a small chance (20%) that we will see a gap reversal this morning. The news is simply too good. If the market continues to “fill the gap” after the first 30 minutes of trading, keep your powder dry and wait for support.

Support is at $417 and $419 and resistance is at $420.
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