Last week the S&P 500 rallied to a new relative high and we are only 200 points from the all-time high. Optimism over a speedy economic recovery was fueled by strong economic releases last week. If activity is sluggish, the government (fiscal stimulus) and the Fed (quantitative easing) will provide assistance. Asset Managers are counting on this safety net. This has been a low-volume rally and these gains can easily be stripped away. Take profits into strength and reload on a market pullback.

Last week’s Unemployment Report revealed that 2.5 million jobs were created when a loss of 11 million jobs was expected. ADP also reported better-than-expected job growth in the private sector. ISM manufacturing and ISM services are forward-looking surveys and both numbers were better than feared. Consumers are ready to resume their normal lifestyles and Coronavirus fear is subsiding.

China reopened its economy in April and their PMI’s last week were above 50 indicating economic expansion.

Nationwide rioting and looting did not dampen investor spirits. Increased tension with China has also been discounted and President Trump did not impose new sanctions against them during his press conference 10 days ago.

Swing traders should reduce risk into this market rally. On a technical basis, the market is overextended and we should see profit taking in the next two weeks. We are not going to short this rally, we are going to wait for the dip and buy. The rebound from the March low has been much stronger than anyone expected and we want to wait for a better entry point. CEOs have pointed out that Q2 will be much worse than Q1 and we can expect large losses when earnings crank up towards the end of July. Stocks need time to grow under their current valuations and I believe that we should see a pullback in the next few weeks. We’ve had a great run this year and we are going to wait for the next window of opportunity. Each week we will look for a few bullish put spreads, but our exposure will remain light.

Day traders need to make sure the opening gap higher holds this morning. Up gaps have been very difficult to day trade because stocks have jumped higher and because relative strength is more difficult to identify. If there’s going to be a gap reversal, it will come in the first 45 minutes of trading. The chances of a reversal decrease substantially after that. Use that first 45 minutes to identify stocks with relative strength and try to buy on a market pullback. The typical pattern has been a gap higher, a compression during the first hour, a gradual drift higher for an hour and a tight range until the last hour of trading. I will be trading half of my normal size early in the morning and one quarter of my normal size in the afternoon.

Look for a gradual drift higher on light volume. A reversal off of an opening gap higher and/or late day selling would be signs of exhaustion.