Breakouts are nice, but we need follow through.

PRE-OPEN MARKET COMMENTS WEDNESDAY – Last week the market broke out to a new all-time high after a 50 basis point rate cut by the Fed. They said that inflation is within their target range and that they want to preserve employment. They do not see any dramatic declines in domestic economic activity and they do not want to wait for that. This is a bullish backdrop for the market.

I mentioned in yesterday’s comments that global economic growth is slowing and that this might be part of their consideration.

From a pure technical perspective, breakouts are nice, but we need to see immediate follow through. If we don’t get that, it could be a sign that the breakout was influenced by triple witching. It is normal for the market to test the breakout and that has taken place the last few days. Yesterday the market probed for support and it jumped off of that low and it closed near the high of the day. This is the type of price action we want to see, but it was NOT accompanied by high volume.

Why is immediate follow through so important? Asset Managers won’t chase stocks at a new all-time high. They will wait to see if there is immediate follow through buying the very next day. That would be bullish and it would be a sign that buyers are very aggressive. They don’t feel like they will have a better opportunity to enter. The news is so good that they don’t wait. This level of buying also keeps sellers sidelined and they hold off for higher prices. This is why we want to see price explode through resistance and we want immediate follow through. Anything less than this is NOT as bullish. It is common for the market to retest the breakout. Asset Managers don’t typically chase new all-time highs and in this case they want to see if the breakout was triple witching related. The retest of the breakout will be brief and shallow because some buyers are excited. Once support is established, the market will jump off of that low and more buyers will join in on the notion that the breakout was legitimate. In this scenario, buyers are moderately interested and the move higher will be tenuous with plenty of bid checks. A gradual float higher results. I believe this could be the scenario that is playing out.

The bearish scenarios would include no follow through to the breakout. Over time, the selling pressure is too great and buyers put their wallets back in their pockets. The bid softens and a choppy drift lower ensues. Mixed overlapping candles are a sign that the pullback will be brief and shallow. Once support is established, there will be another attempt at the high. The most bearish scenario is a gap up to a new all-time high and a massive gap reversal that same day with a close on the low of the day (bearish engulfing candle). Sellers are smacking every bid in sight and the odds of follow through selling are high.

This is how you read price action. The candles tell a story and I’ve just explained it to you.

I liked the bounce off of the low yesterday, but it came on light volume. The news this week is light and there is not a catalyst. This would be the perfect time for buyers to flex their muscles. “They don’t need no stinkin news” and they want to buy right #$%^ now!! The Fed is dovish and domestic growth is intact. We are NOT seeing this level of excitement so we need to temper our bullish bias. We expect dips and we welcome them. This is going to be a tenuous move higher so as day traders we wait for them. Once the market has formed support, we buy the strongest stocks on our list. We will not be suckered into shorting these market dips intraday because the market just made a new all-time high. We repeat to ourselves, “buy dips, buy dips, buy dips”. If the dip looks particularly daunting… don’t buy. For God’s sake… DO NOT SHORT! It’s OK not to make money, but it is devastating to lose money.

Some of you are perma fade traders. If the market is going up, you want to short. If the market is going down, you want to buy. Trading against the trend will end your journey. If it helps to keep you from shorting, tell yourself that there will be many opportunities to make money on the short side off of an all-time high ONCE YOU HAVE TECHNICAL CONFIRMATION. Long red candles below the breakout with late day selling on heavy volume will signal that sellers are in control and they are aggressive. Do you see that now? No. Stop shorting. It’s hard to find good shorts and there’s a reason for that.

From a swing perspective, you have starter long positions on. If the market recaptures the all-time high this week on good volume, you can add. I don’t believe we are going to get the volume component of this equation so your swing exposure should be minimal.

Next week’s economic data points will move the market. If the data points are weak, the market will worry that the Fed saw the warning signs and that they acted aggressively to fend off weakness. The market will drop and fear that the Fed waited too long will result in “risk off”. If the economic numbers are good, the market will get the “all clear” confirmation it needs and buyers will return.

Support is at the 50-day MA and resistance is at the all-time high.