Thanks to an early and sustained surge of buying at Tuesday's regular session open, the E-Mini S&P 500 futures (Es) extended its streak of session closes above the five-day exponential moving average (EMA) to an astounding 23. Tuesday's buying also pushed the Es out of its week-long balanced state, and back into an imbalanced (or trending) condition. Put another way, our momentum, or initiative buyer returned at Tuesday's open and is once again in control.
Ordinarily, I would point to an upside break from multi-session balance and encourage traders to either get onboard the bull train, or, if biased toward the short side, remain on the sidelines and do nothing. But I believe that piling into the market on the long side at current levels is more than a little risky. In fact, I believe bullish traders should approach the current market strength with extreme caution.
My most immediate concern has to do with the fact that the SPDR S&P 500 Trust (SPY), along with the Powershares QQQ Trust (QQQ) and SPDR Dow Jones Industrial Average major (DIA) are all triggering Relative Strength Index (RSI) readings above 70. Readings above 70 are generally not an ideal time to initiate new, higher timeframe long positions. As a rule of thumb, I avoid playing the market too aggressively on anything other than the day timeframe when RSI readings become stretched (above 70 or beneath 30).
As far as the iShares Russell 2000 ETF (IWM) is concerned, I'm still concerned by its inability to sustain a break above the early-September swing high. Perhaps it can regain its footing and make another run at holding above $118 in the days ahead, but for now, I think the odds of a decline toward $113.5-$114 are every bit as high as a secondary attempt at that early-September high.
My other concern relates to this unbelievable streak of session closes above the five-day EMA. Chad Gassaway, CMT (@WildcatTrader on Twitter) noted on Monday that prior to the current streak, the S&P 500 cash index had only closed above its five-day EMA 22 days in a row three times since 1990. So the current streak marks only the fourth time we've seen this degree of sustained buying in roughly 25 years. Suffice it to say I'm concerned those initiating new longs near 2050 are doing so in the nosebleed section of the market.
The bottom line is that while all timeframes continue to favor the bulls, breakouts to new highs in an obviously overbought market often carry substantial near-term risk. If you're going to chase price into the stratosphere, make sure you do so with a sharp eye on value. Any near term decline back beneath 2036-2037 (composite value) would likely be sufficient to scare our most recent buyer into liquidating his newly acquired positions.
- Keeping in mind that I'm rarely an advocate of fighting or fading a trending market (which this market clearly is), I want to mention a few tech stocks on my bearish short-sell watch list in the event the tape throws everyone for a loop and begins to weaken. The names on my list are IBM (IBM), Twitter (TWTR), Yelp (YELP), Facebook (FB) and Google (GOOGL). Since a rising tide has a tendency to lift most boats, I don't want to focus too much energy on identifying shorts at the moment. That said, any hiccup in the broader tape and we'll revisit these names in a hurry.
- After being asked for an opinion on Cliffs Natural Resources (CLF) by several readers, I thought I'd remind folks that iron ore futures continue to make new lows. I have zero interest in playing CLF (on the long side) on anything other than the day timeframe until a bottom in iron ore futures begins to take hold.
- Please check columnist conversation prior to Wednesday's open for an updated Es volume profile and trade plan.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS.
At the time of publication, Bob Byrne was long $204/$200 Dec. SPY put spreads.