Stocks Set to Bounce: Backtest, Retest, or New Highs?

Technical AnalysisWith stocks set to open higher by nearly 1 percent, the bulls are on parade again. This gap higher will likely offset a good portion of the losses incurred last week, but is likely to disappoint many traders that dialed back exposure into the long weekend. Either way, this uncertain, unknowing action of gaps and craps is pretty common when volatility sets in near market highs (and tops). This isn’t to imply a top is in, but it is something to be aware of, and measure against. As well, it’s pretty simple to monitor the price action over the very short-term from here.

In this instance, the market reversed course and pulled back a few percent very quickly. As well, it broke the near-term uptrend line. From here, the market has three options: Backtest, Retest, or New Highs.  Looking at the S&P 500, price will either backtest a key fib (i.e. the .764 at 1675 or the broken trendline (1680), continue upward to fully retest the highs around 1687/88, or break to new highs. With stocks set to gap higher, we’ll quickly know. Considering that the move lower was out of character (big reversal bar) and came after an exhausting march higher, I’d be inclined to think that the market is starting to run low on “juice.” But price doesn’t care what I think… nor should I.

The price action this week (on into early next week) will be of great interest to traders and investors alike. Will end of month power the bulls (and stocks) to new highs, or will the reversal bar and key price retracements hold the market back?  Let price guide you – see the chart below.

Hope you enjoyed your weekend. Trade safe, trade disciplined.

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SPX daily chart_May 28, stocksaa

Twitter:  @andrewnyquist  and  @seeitmarket