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This Pattern Was Very Bullish Yesterday - Market Should Run Today

Posted by Pete Stolcers on February 19

Posted 9:30 AM ET – During the last two weeks the market has been testing the bid. Resistance has been fairly stiff and an uptick in inflation has sparked a rise in interest rates. As I’ve been stating in my comments, I don’t believe that rising yields are a major threat to the market. I believe that profit-taking set in when the market was not able to make a new high and it simply needed time for the bid to grow. The S&P 500 is up 20 points before the open today and I’m looking for nice upward movement into the weekend.

The Fed has stated that it will let inflation rise above its target. They are much more concerned with unemployment and they have no intentions of raising rates until job growth is back on track. Most analysts believe that we won’t see an interest rate hike until 2023. Even with the small uptick in interest rates, yields are still at historic lows and they have a long way to go before they will impede economic growth.

The economic numbers have been very solid recently. This week we saw a 5% rise in retail sales. Consumers are spending and that bodes well for economic activity. Typically, good news is bad news. Increasing economic activity prompts the Fed to raise rates. That is not a current threat and good news is actually good news. We are ins a “sweet spot”.

Democrats have promised a $1.9 trillion stimulus bill by the end of February. They control Congress and the White House and they have stated that they will do it with or without Republicans. This would be a huge liquidity injection and that money will find its way into the stock market.

New Coronavirus cases are declining rapidly. In November we had 11,000 cases per day and now we are seeing less than 1700 new cases per day. That is an 80% drop and vaccinations will push this number down even faster.

Swing traders are long SPY. Use $385.80 is your stop on a closing basis. You should also be long calls and short bullish put spreads. I suggest keeping your call positions on a fairly tight leash if we don’t get a breakout in the next two weeks. A massive stimulus bill could result in a buying climax. Make sure that your calls are far enough out (at least four weeks) to minimize the effects of time premium decay. The market has been flat-lining and bullish put spreads have been the better strategy. If the market rallies above SPY $400 you should start taking profits. I still feel that $405 is within striking distance in the next month.

Day traders should wait to see if the early gains this morning are preserved. I believe they will be and any dip will be shallow and brief. We might only see a compression on the open and that could be the extent of the bid check. We need to be cautious when the market gaps higher and we want to make sure that prices don’t reverse. After three hours of trading yesterday we saw consecutive long green candles closing on their high on a five minute chart of the SPY. I referenced this in the chat room and I told members that this was extremely bullish. We haven’t seen that level of enthusiasm (buying) in a couple of weeks. The market continued to rally into the close yesterday and much of the gap was closed. This morning the S&P 500 is up 20 points and I believe we will see a nice rally. As always, focus on stocks with relative strength, heavy volume and technical breakouts. Option Stalker searches like Heavy Buying will work great on the open. We are seeing rotation into cyclicals and I believe those will present excellent buying opportunities. Semiconductors have also been hot. Financials will also get a boost if the stimulus bill looks likely. Look for a strong day.

Support is at SPY $387.50 and resistance is at $392.50 and $394.
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