Market rallies again!
From where we left off last week, the SPX did not retest the recent high of 12 Mar 07, it flew through its 20, 50, 100-day moving averages in 1 single leap! Its next resistance now is the 78.6% Fibonacci retracement at 1441 (see chart below).
From the beginning of this week (Mon and Tue), the market had attempted a mini-rally of sort. What was lacking then was the high volume which indicated the lack of institution buying. Granted that last Friday was the triple-witching expiration and volume in all exchanges was high, the volume on Monday and Tuesday will be significantly lower. However, volume on Monday and Tuesday was way lower than an average day. In fact, it was the second lowest volume trading day for 2007. Therefore, without the signs of institution buying, the up-move seemed weak.
However, the Fed changed everything. The Fed’s announcement that everything is cool: no inflation fear and therefore no change in interest rates. Market seems to like this comment and thus, we have the Dow gaining 159 points, SPX gaining 24 points and the RUT gaining 13.87 points.
As I mentioned last week, the plunge on 27 Feb was a one-way, one-day event. Institutions sold stocks big-time and at the same time, riding on the plunge, sell more than what they owned. More short sellers joined in in the next few days, driving the market even lower. The up-move on low volume on Monday and Tuesday must have made short sellers sat up and realized that the downside party may soon be over. But seeing the low volume, they decided to wait for confirmation. So, after the Fed’s announcement, suddenly the market seems happy again and it didn’t take long for sellers to realize that they have to cover their shorts. So more buying orders came in as more sellers cover their shorts and the market lifted off.
Of course this is only a possible explanation of what happened yesterday. There may be other reasons to explain the big move yesterday such as end-of-quarter window dressing or too much cash floating in the market after options and futures expiration on Friday, etc, etc. It’s impossible to really know. But I just thought it’ll be interesting for some readers to think about what I wrote.
Anyway, what is to come? Ha, the holy grail of the market isn’t it? I wish I know… Well, as usual let me share with you my guess. My guess is that the market needs some time to digest yesterday’s move. Those who were long may want to sell when the market bounces further up. They may want to do that to lock in the gain. They may think that the up move was temporary. Or they may have been waiting for this move to breakeven after buying at the highs before the 27 Feb plunge. Those who were short will buy back to cover their shorts whenever there is a dip to cover their losses. Basically, the market may consolidate for a while now. Neither moving up nor down.
This is great for our neutral positions! No more violent swings please.
For the SPX we’re looking at 1441 level as the next resistance and 1406 for support. 1441 is the 78.6% Fibonacci retracement while 1406 used to be the 38.2% Fibonacci retracement. Previous resistance becomes support.
For the Dow, the next resistance is also at the 78.6% level, which is 12, 636. The immediate support will be the previous 12 Mar high of about 12, 335.
As long as these support and resistance levels hold, the market is likely to be range bound for a while.
We may enter 1 or 2 more condors for April to take advantage of the tight-range market in the next few weeks. We’re currently stalking a few possibilities. Also, we will be looking to close up some of the positions as soon as they’re showing a decent profit to lock in the profits. You never know what will happen next in this market conditions.
Take care and good trading!
Gary
