Market Breakout Needs To Happen Soon. Watch For a Close Near the High of the Day

February 26, 2014

The market is trying to break out, but it needs a catalyst. Each day stocks have rallied and late day selling has pared the gains. When we see a close near the high of the day, we will know that the next leg of this rally is about to begin.

Janet Yellen will testify before Congress tomorrow and that could be the “shot in the arm we need”. Her statements are calculated and she has a calming effect on the market.

The economic releases this week (durable goods, initial claims and GDP) will be soft. Bad weather will be blamed and traders will give the numbers a free pass. Any upside surprise will spark buying.

Economic conditions in China are slipping, but growth is still at 7.7%. The PBOC could jump and action since China’s growth target for 2014 is 7.8%.

Europe is not getting its due. Activity continues to improve and this recovery might gain traction. The EU has weighed on the market for years and this has the potential to be a catalyst the rest of the year.

The worst winter storms in decades have disrupted activity, but the data is still fairly strong. With each passing week, weather will play a smaller role. Pent-up demand could be unleashed this spring.

Retailers are reporting results this week and they are dismal. However, bad news is priced in and the stocks are rebounding after the announcement. This sector could provide a boost to the overall market.

I’ve painted a bullish picture, but we need to use caution this week. This is a five-week option expiration cycle and the first week tends to be very boring. When the market fails to break out, we could see a light wave of selling and we could hit an air pocket. Bullish speculators are lined up and they are expecting a breakout. When that fails to materialize, sellers will flush them out.

The bid is strong and any dip will be brief and shallow.

I am long calls and my average price is good. I have moved my stop up to SPY $184. If I get flushed out, I will scratch. I also have a time stop on my positions. I want to see a breakout and follow-through this week. If I don’t get it, I will exit my call positions and I will wait for a better entry point.

My positions are relatively small. When we do eventually breakout, I will ramp up my positions on follow-through buying and closes near the high of the day.

We’ve tested the downside this morning; let’s see if stocks can recover. A new low after a few hours of trading would be a warning to go to the sidelines.

Option traders need momentum and if we can’t breakout in the next few days, it does not make sense to “hang around”.

I sense a good buying opportunity. It could happen this week, or it could happen after major economic releases next week.

Stay long, but keep your trades on a short leash.
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