Extended Market Rally Pushes Prices Higher

As the market closed its fourth consecutive day to the upside, traders are asking if this push higher is more than a short-term rally.

There may be better odds at putting toothpaste back in the tube that definitely saying this market is back on track with an extended bull run.

Market internal signals and a series of economic events this week may neutralize this extended market rally.

Have recent gains killed bearish sentiment?

Members of the online Simpler Trading community regularly ask, “Since the stock market has been bearish, is there a change in thought with this extended stock market rally?”

The simple answer is, “No.”

The market has done nothing of significance to change the long-term course, according to Sam Shames, Vice President of Options at Simper Trading. He sees bearish internal signals as continuing to progress, even if slowly, over time.

“The signals driving the thought process that markets will go much lower are based on monthly signals,” Sam explained. “It is completely possible, and expected, to have upswings on the weekly time frame within the context of a peaking and falling monthly.

“It is important to always ask what time frame a trader is referencing to best understand what they are trying to say.”

Sam explained that stock chart signals can and often do take longer than people like to wait, so patience is required.

“I believe that the short-term signals favor a bounce – potentially a very large bounce in percentage terms,” Sam said. “However, once that short term ‘cycle’ has completed, the larger monthly cycle remains active and that continues to point to significantly lower prices in the months to come.”

As he watches for moves ahead, Sam shared how this week he’s watching the short-term outlook that indexes will bounce in strong internals, a flat to down U.S. dollar, and no unexpected “surprises” before the Federal Reserve (Fed) meeting Wednesday and Thursday.

“I don’t expect the Fed meeting to be an issue as most of that is already baked into the cake, and there is even a risk to the upside that the inflation numbers come in colder than expected due to the large drop in gasoline prices,” Sam said.

Key economic data releases this week include the U.S. Consumer Price Index (CPI) on Tuesday, the U.S. Producer Price Index (PPI) on Wednesday, and the retail sales report on Thursday.

Watching inflation, US dollar, commodities

Inflation is still running at a 40-year high and could be the straw that breaks the market just as easily as positive CPI news could fuel an extended stock market rally.

“Inflation expectations have almost fully crashed back to ‘normal’ levels,” Sam said. “We can also see the same in the price of crude oil.”

Commodities are an area to watch as the market sorts through the various outside economic data and monetary policy influences this week.

“We are already seeing commodities try to come back to life… oil above $86, gasoline

bouncing off major support, grains setting up, copper double bottom off the weekly 200-day simple moving average,” Sam said.

Commodities and inflation could easily double dip and charge higher again,” Sam noted. “What is interesting about previous examples of inflation is that it would not be uncommon to see inflation come back down to more normal levels before spiking again at some point later in the future, especially if central banks lose sight of the ball.”

Sam is watching for a break lower in the U.S. dollar which could help drive the commodities narrative again.

“This is not an easy thing to call as it is still quite early in the process, but there are some of the best bottoming signs yet in the EUR/USD (Euro/U.S. dollar) pair,” Sam said. “Below 108 on DXY (U.S. dollar) likely brings commodities back in fashion in a quick way.

The dollar closed at $108.30 on Monday and the EUR/USD exchange was at 1.0115.