Marubozus and 50-day SMAs abound

The rally during the past five trading sessions has been nothing short of spectacular with some of the most extreme moves ever witnessed: From Tuesday’s low to today’s close the Russell 2000 ($IWM) is +13.78%, high-yield corporate bonds ($HYG) are +9.33%, and the S&P 500 ($ES_F, $SPY) is +11.31%. Amazing! However, we are only back to levels seen just two weeks ago so don’t get too excited.

Today’s rally felt like mutual fund front running which was confirmed by a large (~$1 billion) market on close buy imbalance. Volume was relatively light which is evidence of a lack of enthusiasm in the rally while sellers have dried up and backed off, moving their offers up to higher price levels. There were large green marubozu candlesticks practically everywhere today which usually means that higher price levels lie ahead over the near term – However, I believe that chasing this rally at these levels is VERY dangerous. If a pullback to the 117-118 level on the SPY (1170-1180 on the cash S&P) were to be bought up quickly over the next 1-2 days then I would have a much greater degree of confidence in this rally.

For the time being I prefer to view today’s euphoria as another rally within a range bound market as characterized by the fact that 95.9% of liquid stocks closed above their respective 5-day SMAs while 80.2% remain below their 200-day SMAs (via @daytrend). Many of the charts below are still wrestling with key resistance levels or remain below their 50-day SMAs. It should be noted that another likely explanation for much of the buying at the close is the fact that the S&P 500 closed above its 50-day SMA for the first time since late-July. This fact alone would have triggered many technically based black box trading systems to enter new long positions or to cover short positions. For my part I will be looking to move into a net short posture on a move above SPY 121 or buy a quiet pullback to SPY 117, I view the current market closing levels as a “no trade zone”:

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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