“Light” PPI Sparks Another Big Rally

The price action on this gap up is going to tell us exactly where we go from here.

PRE-OPEN MARKET COMMENTS TUESDAY – Yesterday the market retreated late in the day on light volume. That is a reminder that sellers are never far away and that we can expect volatility. This morning the PPI came in at a better than expected .2% and the S&P 500 added 30 points to the 40 point rally that was already underway.  

We have record levels of cash on the sidelines, stock buyback programs and seasonal strength to fuel this move. The list of bearish influences is too long to list. For now, buyers have control.

Swing traders bought SPY on the open Friday ($395.60). Use a $396 as a stop (closing basis). We have a nice gain this morning and I don’t want to lose money on this trade under volatile conditions. The SPY needs to close firmly above the high from Monday today. If this happens we will test the 200-day MA soon. If it can’t do that it will suggest that resistance is building and that we could see a pullback in the next week.  

Day traders should not rush in and buy. After a big gain last week, this gap higher feels vulnerable. I believe there is a chance for early weakness and we will probe for support in the gap. If half of the gap holds, I would view that as fairly bullish. During this test I want to see mixed candles with overlap. That will suggest that buyers are engaged. If this drop is brief and we see stacked green candles off of the low of the day – buy. That would be a sign that Asset Managers will aggressively buy any dip. If the market is able to hold the bid and it compresses or inches higher the first two hours, the market will test the 200-day MA during this bounce. It could happen quickly or it could take a week. That type of price action would be bullish and Asset Managers will get FOMO. This rally has come very quickly (2 trading days) and that typically means that they are under-allocated. If we see stacked red candles with little overlap we will fill most if not all of the gap. I feel this is less likely since the “light” PPI gives the Fed breathing room to slow the pace of tightening.

Support is at the 100-day MA and resistance is the 200-day MA.