Market Report 3/7/16

Last week the market added to it’s recent gains and is in overbought territory. You will remember a few weeks ago when everyone was bearish and thought the bottom was about to drop out, I took a contrarian stance and suggested the market was due to rally. Going into last week it was impossible to tell if the rally would continue or stall out around the 1950 level so I presented a couple scenarios on this chart.

The market continued to take the direction of the green arrow and closed at 1999.99, such an odd number. While it seems like this rally is getting long-in-the-tooth, this week we have the ECB meeting and many are expecting further stimulus. But the big “binary event” is the upcoming March Fed announcement on March 16th.

Here’s a look at the current SPX daily chart with some markups and possible scenarios which I will explain below.

SPX_d_352016

First of all I pointed out recently on the shows that it wouldn’t surprise me to see the SPX push up to the underside of the 200-day moving average right around the time of the Fed announcement. Since that’s a week and a half away, it seems at this point it’s come “too far too fast”. While it’s still just a tad below that 200-day moving average, Friday’s high came pretty darn close. The “zone” in between the 100-day and 200-day was the original reference point. Friday’s close was right at the 100-day (dashed line).

The next key level to me is where the first downward sloping trendline meets the 200-day sma and converges on Fed day. That’s where I drew the first little green circle. So it won’t surprise me to see a bit of a pullback first and ultimately end up in that area going into the Fed announcement. It could easily pull back first and then drive back up to that area as the Fed meeting approaches.

Another possibility is that Mario Draghi adds fuel to the fire this week with talk of more stimulus and it touches the 200-day sooner rather than later. In that case there’s a possibility that the market “overshoots” and heads into Fed day closer to the upper circle I drew, closer to the top downward-sloping trendline. It almost seems like that would be the “pain trade”. The area somewhere between the two downward sloping trendlines is the ultimate target of this move, then we have to see what happens.

So many experts have been skeptical of this rally from the start and I’m certain tons of shorts have been caught off guard. The nature of bear market rallies is that they tend to convince everyone that the worst is over and make them rethink their bear market stance. They might just be able to squeeze this market all the way up to the zone of that big ? I drew.

However we still have to see what happens this week so i don’t want to assume that’s anything more than a potential scenario.

As I mentioned the market is very overbought. That doesn’t mean it can’t go higher but the potential for a near-term pullback increases every day.

Here’s a look at the weekly McClellan oscillator which shows the market closed last week the 2nd most overbought it’s been in several years.

T2106_362016

Like I said, this doesn’t mean it can’t still push higher in the near-term, but it stands to reason it’s getting stretched here. There might be a bit more upside left but I can’t help but get the feeling it’s setting up for a down-cycle. The timing of that is the trickiest thing. I think the very first down day or two, everyone will think “ok, that’s it for this rally” and perhaps look to get short. Then it won’t surprise me to see that first round of shorts get blown out and have to cover within a few days. That’s where it will get really tricky.

Between the upcoming ECB meeting and the Fed announcement, it’s going to be a wild couple weeks. As I mentioned, the Fed meting is a “binary event” and that would be the perfect day for the current rally to end. As someone mentioned a few weeks ago on the show, which I’ve brought up several times since then, this current rally might provide the Fed cover to raise rates again. I think the conventional wisdom is that they are going to hold off and stand pat this time. I honestly have no idea but it seems like the market isn’t pricing in a March hike. If the market is able to rally up into that zone on the top chart and they do hike, that would likely provide the perfect catalyst for a reversal. Actually, the Fed meeting itself, no matter what they do – could easily be the catalyst for a reversal.

Like I said, it’s going to be an interesting couple of weeks here.

There’s another possibility that I won’t rule out and that is the market doesn’t maintain this trajectory and we see a pullback start this week. With the overbought conditions and the move we’ve seen the past few weeks it’s obviously too late to get aggressive and turn bullish now with the SPX up almost 200 points (roughly +10%) in just a few weeks. Recall that down near the lows I was the contrarian, but the higher we push here the more nervous I get.

Switching gears we have a couple open trades that will get closed this week. XIV made it back to the entry and then pulled back a bit Friday. The open Monday and the first couple days will likely determine whether it hits the target or the stop. ZAGG is releasing earnings Tuesday after the close so we have two trading days to close the position. There’s no way I want to hold it over earnings. As you know that’s one of the things I almost never do because there’s just no way to know how it reacts. If it doesn’t hit the target or stop Monday, on Tuesday I’ll be closing the position regardless of the price.

Over the past couple weeks we’ve looked at tons of stocks that made nice moves. May of them were discussed on the shows and some were posted in the Chart Feed or in the Focus List or the Stock Picks section. The odd “short squeeze” market behavior last week made it difficult to just throw out a bunch of swing trades because the day to day behavior of many stocks is questionable. Some of the metals and mining stocks had parabolic moves and look like they topped and reversed Friday. I’d also be very careful with the energy stocks going forward as they had the same type of behavior – mostly based on the fact oil has had an up-move.

This week will be sort of a “regrouping” week as I look for new ideas and the two open trades we have get closed. Over the next couple weeks I have a “I don’t trust this market” attitude and will do my best to find a few new swing trades here and there, but based on what I see it’s not time to get aggressive.

As a matter of fact I’m almost thinking the time is approaching to think about shorting using some of the inverse ETF’s. But as I mentioned above, I don’t want to be early because there’s a good chance the first round of shorts gets blown out. It’s going to be a tricky couple weeks here but I can guarantee there will be plenty of good short-term trading ideas both in the Stock Picks each day and on the live shows.

Two stocks in particular we discussed several times CFMS and MKTO had the perfect setups as far as the 9-ema and the 17/43 setup. As I’ve combed through my scans I haven’t seen anything quite as nice as those at the moment, but I will be on the lookout. Every day presents a new opportunity for certain stocks to set up and I’ll do my best to pick the highest probability, low-risk setups and bring them to you.

Please join me for the live shows this week and we’ll take it as it comes, trading based on what we see happening on the charts instead of what we think might happen.