The S&P 500 has been making new highs for the last two weeks and this is where the rubber meets the road. Q1 earnings will ramp up this week and we will see if profits will keep up with lofty expectations. Last week we got a sampling of earnings and the results were good.

Almost 10% of the S&P 500 has reported and earnings growth so far has been 30.2% Y/Y. This compares with 24.5% expected at the end of Q4. Earnings expectations have been exceeded estimates 81% of the time so far and revenue growth has been about 7%. The early releases were dominated by banks and we will hear from other sectors this week. Mega cap tech earnings don’t start until next week.

The S&P 500 is technically overbought, but it can stay that way for a long time. The trend line at the upper end of the trading channel has been breached and that is typically a warning sign. The market is also trading at the upper end of the 20-day Bollinger Band. Trading volume has been relatively light. Bulls are not chasing, but they are buying dips.

Economic releases have been strong and there is no threat of Fed tightening. We are in a sweet spot as states reopen. New Coronavirus cases are rising domestically, but the vaccination rate has hit 3 million per day. Europe and Asia are still struggling to reduce new case counts.

Swing traders should place a stop for SPY at $414 and a target at $420. Some of your bullish put spreads expired last week and some of them will expire this week. You should not be adding two new positions, manage your profits on current positions. If you can buy your spreads back for pennies I suggest releasing the margin and reducing your risk. The market has not shown any signs of weakness so you don’t need to panic out of positions. Prudently take profits into strength. When profit-taking does set in, it happens very quickly. The stair-step pattern is likely to continue and now that we’ve had a good run, we can expect some selling pressure. I will be ready to reload on the next market pullback.

Day traders should wait for support this morning. Asian markets were pretty flat and European markets traded a little higher. There is not a lot of incremental news over the weekend and traders are likely to wait for the earnings releases to crank up. I believe we will have a fairly quiet trading day. I have been finding many great shorting opportunities during the day. These moves have been sustained for hours and they gain momentum once support levels are breached. I’m not seeing the same momentum on the long side and the moves are short and swift. You have to set passive targets. This type of price action tells me that the market is getting a little tired. If we make a new low after two hours of trading, favor the short side. If we make a new high after two hours of trading, favor the long side.

Earnings will have to be incredibly strong to fuel another leg higher. I will be watching for a rise in VIX/VXX during the next stage of this rally. This would be a warning sign. My target is SPY $420 and we are in range to hit it this week.

Support is at SPY $416 and $414. Resistance is at $418 and $420.