Big up week on the stock markets behind us. Week finished with the bang - gap up on Friday, another strong day, with Nasdaq 100 making new All Time High.
Scheduled news and events for the next week;
Lagarde is due to testify at a virtual hearing before the European Parliament Economic and Monetary Affairs Committee (via satellite) on Monday, and event of the week is FOMC Statement and Press Conference on Wednesday. Market is expecting an increase in already given stimulus, similar like ECB did last Thursday.
Let's move to charts.
Chart #1 - SPX, NDX, RUT and DAX Weekly
This is a "warm up" chart... just to visualize the size of previous week, and to compare indices.
Chart #2 - SPX Daily
Gap up on Friday, above DMA200 (not shown here) approaching better resistance. Large gap above, and both top and bottom of it, can serve as resistance.
Chart #3 - SPX Daily, but "looking to the left"
All sort of failures we can learn from this chart of prior period
>> "Bearish wedge" that broke to the upside.
>> How buying dips (pullbacks) TRUMPS buying ATHs.
>> How you don't want to be Johnny come lately
If you don't believe me, believe Morpheus - CEO of Matrix Hedge Fund.
SPX Monthly chart that I like, from US trader with twitter handle kpak@kpak82:
Chart #4 - RUT Daily
Small cap index - Russell 2000, hit the resistance, both the channel and the horizontal resistance. Managed to move above DMA200 on Friday.
Chart #5 - Mighty NDX Daily
Higher lows all the way, every single liquidation break and dip was bought. New ATH made on Friday. We can prep our "NDX 10k" caps and T-shirts, since 10k is in sight - AS LONG as bullish momentum prevails.
But can we after that, IF we hit 10k at all... prep our 9k caps, OR we just go ballistic?
Since this is the strongest index, that can drag other markets as well, IMO it is important to look at it for clues.
Let's play with some scenarios.
Chart #6 - NDX Daily, Scenario #1
Scenario #1 includes test of 10,000 sweet round magnetic magic number... and a bit more... just to fail later and do what markets does the best - TRAP Johnny come lately buyers, since it can't move higher without liquidating weak hands first. Exactly like on Chart #3.
>> False breakouts above ATHs are not that rare, and you can find them on other indices (SPX, DAX - to name a few) and many stocks as well.
After long liquidation, market goes to first major support where:
A) Finds buyers, and business as usual - BTD from there
B) Moves lower than majority think, causing bigger pain, and then reverse higher
Sub-scenarios possible both on A and B variant ( I know, I know... but predicting is not easy. )
Chart #7 - NDX Daily, Scenario #2
Scenario #2 - Market shoots to 10k, and make a pullback to previous ATH, with a POKE below it. Sellers piling in, but it is just "look below and fail". Short covering rally, goes to new ATHs.
Voice from the background|: "Interesting stuff, BUT what EXACTLY will it be, so I can put my grandmas saving into it, and retire while I am still young?"
I don't know, I will stay open for whatever market brings. I would prefer Scenario #1, with whatever variant that comes next, since that will provide some more time of elevated volatility, since volatility and larger daily ranges - the thing that PROVIDES more opportunities - that is NOT "going to stay" in other case.
But can it be the Scenario #1? Is that even realistic?
Well, SPX approaching better resistance, RUT is on resistance already, and let's see where German DAX is... Spoiler: on Resistance.
But all other resistances have been cleared so far - and that is true also. As markets go higher and higher... resistances should be better and better. Huge run up already, without proper pullbacks, bearish divergence and unfilled gaps is stacking. All information to JUST carry forward, NOT, I repeat - NOT to sell anything based on them. Since SPX prior to this drop from February - Coronavirus bear market - was grinding higher in the channel and made 17 unfilled gaps. So, "stacking gaps behind" - and that info was also on 10th unfilled gap, and on 11th, and on 12th... but it still made SEVENTEEN of them. Bearish divergences can stack, market can be overbought (or oversold) for a long, long periods of time.
Sellers need VISIBLE, DECISIVE downside movement, false breakouts, breakdowns of supports, and NOT to guess the top of the move. Sells are hit and run trades. Entire last week, LTF Bias of DAILY DOSE OF DAX Service was Neutral-Bullish. That means - concentrate on buying dips, as long as bullish momentum prevails.
Lets move to German DAX now.
Chart #8 - DAX Daily
DAX above DMA200, last week started with the dip on Monday, and then all uphill from there, gap ups and strong upside. The theme of the week was making higher lows, show of strength, and increase of stimulus by ECB. Observe the incoming Resistance - 12,885 / 12,990.
Can stimulus move markets? Sure it can. For how long? That is unknown.
This is from Mario Draghi era:
It was great up move for some time, and totally negated after exactly two years. Still, after that, new highs came. Now, voices from the ECB again saying: "No limit."
Let's go down a notch, using "budget" CFD chart (instead of Futures).
Chart #9 - DAX CFD 240 min chart
Moving higher non stop for 3 weeks, making 2700+ points... without large pullbacks. Just bull flagging and higher. Now, on crossroads of horizontal resistance and two channels. DAX closed on Friday on 12,847.68 - let's round that to 12,848. Don't be surprised if we get a gap down on Monday, since DAX hit resistance on Friday at the end of RTH session.
Let's see what happens on Monday.
TRADING SETUPS - TWO EXAMPLES
SPX - Fade of the ONH, Thursday, June 4th
DAX - Buy the dip - Pullback to broken premarket high
That would be it for this edition of StrayDog's Weekly Blog.
In short term trading it is very important to properly understand context heading into every day, to know from which side wind is blowing - who has the short term control, and which side will be forced to liquidate IF and WHEN market hold above or below a certain level. What is the level of volatility, what can we expect from any particular day, what market already done in premarket session, what possible setups can be available, and so on... the things that we constantly learn in the DAILY DOSE OF DAX.