So far, every dip has proven to be a buying opportunity. However, cracks are beginning to show, and we certainly want to be on alert to take advantage of any pullback opportunity to go short.
Consider this:
1. We're getting a mixed picture on the earnings front.
2. The GDP number wasn't horrible, but it certainly failed to meet expectations.
3. Europe is back in the foreground (i.e., Greece and Portugal).
4. Stocks have rallied relentlessly for several weeks.
There are four main events that everyone is looking forward to:
1. The Facebook IPO.
2. Greece and its lenders coming to an agreement.
2. Romney winning Florida.
3. The jobs report.
Once these events are in our rear view mirror, the news will likely be sold.
Technical Analysis
We'll start by analyzing the market profile chart of the E-Mini S&P 500. In chart 1 below, I consolidated the auctions of October, November, and December into a single one. I also did the same with the auctions of August and September. Finally, since the market now appears to be looking past what happened last summer and fall, it seems to be seeking value somewhere in the heart of July's auction. The numbers to watch are 1302 and 1336 on the low and high ends of the value area, as well as 1313 (the auction's point of control). Since price is currently inside July's value area and above the point of control, there's an 80 percent chance that price will make an attempt at the high end of the range.
Chart 1. The market profile chart of the e-mini S&P. Price is currently seeking value within last July's auction.
A similar picture for the S&P cash index is portrayed in chart 2 below. Last July's value area is bound by 1307.50 and 1340 on the low and high ends, respectively. The point of control is roughly 1325. Let's keep these numbers in mind as well. As long as price remains above 1307.50, chances are it will continue on higher toward the top end of the range, especially if it crosses above the point of control.
Chart 2. The market profile chart of the S&P cash. Price is currently seeking value within last July's auction.
Perhaps more interesting is chart 3 in which I merged the auctions of January through July in an effort to isolate the 'good' and 'bad' parts of 2011. Here again, the numbers are 1287 and 1345 on the low and high ends, with the point of control being 1316.
Chart 3. The market profile chart of the S&P cash. The auctions of January through July are merged together in an effort to isolate the 'good' and 'bad'
parts of 2011.
Finally, chart 4 below reveals how the various trend lines and moving averages are coming into play. Yesterday, price attempted to break below the orange line, but buyers quickly came to the rescue. While the S&P did manage a close above the orange line this time, we want to keep an eye on it; a break of this line will likely lead to further deterioration, with the blue neckline being the next downside target. Incidentally,this happens to be near 1287, the bottom end of the value area highlighted in chart3. The chart of the DJIA is similar and will be appended to this morning report shortly after the open.
Chart 4. The weekly chart of the S&P cash index.
Trade Well,
Peter