Will Market Rally Turn Nasty For Traders?

2021-07-14

A glance at charts showing solid price action and upside squeezes might be more sleight of hand from the market than traders are expecting.

The rally at hand doesn’t appear to be broad-based and support may be more like air than technical strength.

The market has proven overextended for some time — pushing +2-3 average true range — with a mix of squeezes firing and then quick pullbacks to the moving averages.

There is also a mix of indexes repeatedly hitting new highs, yet support from key sectors or stocks is weak. An example is the S&P 500 hitting new highs, yet industrials are weak. There is much to watch, such as a strong dollar vs. stocks or AMZN tracking along with bonds.

The rally-then-pullback pattern being observed is a typical phase in the market, but it makes it tough for traders thinking along the lines of “buy the dip” for a slam dunk trade. Various nuances associated with price action, volume, and selling are influencing this market movement.

How realistic is a continuation of this overextended rally into unknown heights? Or, is the market setting up for something a bit nastier?

Simpler’s traders are leaning bullish with a healthy caution for anything nastier.

Caution equates to a trading plan of mostly cash, waiting and watching for higher probability setups within this wild pattern, and looking long into fall months.

The Fed’s “accommodations” to support this market may well prevent an overall collapse, but expectations are brewing that this cyclical phase could lead to a sharp, deep drop similar to last September.

As this market plays the next hand, Simpler’s traders are staying light in number of active trades and watching for honey badgers — assets doing their own thing despite the market.

We Saw: News - Emotional reactions the more the Fed talks —

  • Crypto facing foreign digital currency competition
  • Apple upsets sector with “pay later” plan
  • Mortgage rates drop while home prices soar

We’re Watching: Nuanced technicals revealing anything nasty —

  • For longer plays into early fall
  • If honey badgers can cut through volatility for gains
  • Index new highs that don’t correlate to deeper chart signals