New Highs?

We head into the end of the week approaching new highs. The S&P 500 is currently up 1.5 percent to 2129 as I type. That is about a point off the all-time closing high.

The positive reaction the jobs number this morning adds to the post-Brexit rebound, which has seen a better than 6% rally over the last two weeks. The trend is clearly higher here and we need to respect that. That being said, many of us have been looking for a turn to the downside, but that isn’t materializing at this point, maybe in part due to how many are expecting it.

As Tony said this morning in the Simpler Room, “What makes it difficult to be short or long the indices is the fact that some really smart people…some really respected names in the industry are publicly bearish. Being short means I am just another brick in the wall. I prefer to stand alone.”

David is also looking to the bull case for the time being. “Elliott wave patterns suggest that equity markets are still in a bullish phase targeting new all-time highs in the S&P 500. However, the short-term patterns are equivocal about how to interpret today’s positive reaction to Non-Farm Payrolls. This simple explanation would be that the next leg up has begun as part of the bullish scenario. However, we can’t rule out the idea that the market needs to spend more time in this area consolidating gains since June 27th. Because of this short-term uncertainty we can’t rule out a more significant retracement of gains since last week.”

Chris too makes the case for being long equities for the time being. “I think there is no place to put your money except in U.S. equities, as most of the world perceives us to be the safest market. On the other hand, this kind of mentality leads to severely overvalued markets, as the P/E on the SPX is dangerously high.”

Sentiment can be very powerful. When everyone is publicly bearish, or talking about the downside, it often doesn’t come to pass right away. But with the break to new highs, we will likely see less of that public bearishness. And that is when it is important to watch out for those “overvalued markets” as Chris says.

As far as levels are concerned, we have several good levels of support. David points out that the S&P 500 has a Voodoo skyline at 2113.97. Carolyn was discussing a support level at 2074 with a potential target at 2155.

The VIX has fallen to 13.45, which would be the lowest close since May 27. Back on that day, however, the 20-day historical volatility for the SPX was 11% while today it is 20%.

How do you play this volatile market? You will get different answers from different traders, but there are a common themes. The first is to trade the market that is in front of you. In the case of the S&P 500, the trend is definitely higher right now. But caution makes sense. Raghee suggested remaining nimble and looking to shorter time frames given the recent volatility. Tightening stops and trailing up stops – as Carolyn recommended – is prudent as well.

We look set to post all-time highs in the SPX. That didn’t seem very likely two weeks ago as the Market tumbled after Brexit. As John frequently points out, it is important to have the mindset of “anything can happen”. The markets repeatedly reinforce that lesson.

We head into the weekend just off the all time highs. The S&P 500 climbed 1.53% to close at 2129.9. That is just less than 1 point off off the all-time closing high set back on May 21, 2015.

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This article was written by Simpler Trading’s Editor-in-Chief, Chris McKhann –

Chris McKhann has been involved professionally with the stock market for more than 15 years and specifically with derivatives for 12 of those. He started as a stock broker, but quickly moved on to options and futures trading. He spent some time as the Derivatives Product Manager for TD Ameritrade. He was the chief analyst and hedging strategist for OptionMonster. He has been an options trading educator and content provider for many years. His writing and analysis has been featured on Reuters, the Wall Street Journal, Forbes, TheStreet, CNBC and internationally. He has also designed and traded option and futures strategies for prop trading firms and hedge funds as well as managed accounts.

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