When the market breaks through a technical resistance level it often tests that level soon after the breakout.

PRE-OPEN MARKET COMMENTS THURSDAY – It’s hard not to get caught up in all of the excitement when the market breaks out. This was a substantial move with follow through and it will lure in many bullish speculators. We don’t chase breakouts, we wait for confirmation. That’s why I’ve been advocating day trading.

Many traders will build large bullish positions and they will be over-exposed. When the market has a normal pullback to the breakout level, they will be flushed out. The programs will try to exploit that. If the pullback is stubborn, the market will find support at or above the 100-day MA and it won’t stay there long. This would be a sign that “late commers” who missed the breakout are aggressive. That price action would be bullish and that will provide a much better entry point for swing traders. If the path back to the 100-day MA features long red candles, that suggests heavy profit taking and the breakout could fail. If that happens, the selling on the backside of the move will be heavy.

I believe that much of the rally this week has been mechanical. Institutional traders were not expecting a trade deal with China and they had to scramble to adjust. That’s what fueled the move. This rally was not based on improving global economic growth.

The news cycle will remain bullish. New trade deals will be announced, but China was the big one. They will not have the same impact. The budget bill is in Congress and it includes many tax cuts. That would be bullish for the market and that should keep buyers engaged.

The economic calendar is light. PPI dropped to -.5% and that was much better than expected. From my perspective… be careful what you wish for. I don’t view this as the result of “drill baby drill”, oil prices are down because of a drop in demand and not because production has increased. The second largest consumer in the world (China) is hurting and they are in a deflationary period. Central banks around the world have been cutting interest rates because they see a slowdown in economic growth as a much greater threat than inflation. This morning Philly Fed and Empire Manufacturing both fell. Initial jobless claims were steady at 229K.

I’m trapped in one of those funky periods where I believe the market can move higher short-term, but where I remain bearish longer term.

New trade deals, a budget bill and a good jobs report will support this breakout. As all of that good news cycles through the market, the longer-term backdrop will continue to deteriorate and it might take a month before that weakness is in focus.

I am not entering any longer term swing trades. The volatility this year has kept me largely sidelined. The market is trading based on tariff news and I need to let all of that pass. I still feel that on a longer term basis, the market will move lower and I don’t want to get cute trying to trade this breakout. I know that I will look foolish for not joining such an obvious move higher and I’m OK with that. I feel I can catch most of it day trading.

Overseas markets were down slightly. That is going to put a little pressure on the market, but this is the first drop we’ve seen this week. I believe the odds are good that it will get gobbled up and that the market will bounce early in the session. All of the late commers will view this as an opportunity. If the market bounce is stubborn today, it will suggest that resistance is heavy and then we could see a heavier round of profit taking tomorrow or early next week. The strength or weakness of the first move today will be your guide.

Support is at SPY $580 and resistance is at the high from yesterday.