A wildly bullish Dow gives me pause.

As many of you know, I am always cautious when I see a market gap up to new highs.  With the wildly bullish Dow Index gaping to another record high raises caution flags.  The muted price action of the QQQ, SPY, and IWM means that only 30 companies are trying to lift the entire load.  It is possible, but such a strong gap after major rally could also produce an exhaustion pattern.  Make no mistake, the trend is up, and I will stick with the trend, but I will not chase this gap.  Chasing a gap after a major rally is a kin to playing Russian roulette with a loaded gun.  Avoid emotion with a well thought out plan and have the discipline to follow that plan to protect you from you!

On the Calendar

The Economic Calendar starts August with Personal Income and Outlays at 8:30 AM Eastern.  Incomes are expected to increase 0.4%. However, spending has remained muted only rising 0.1%.  Consensus for the core PCE is 1.4% yearly which is only a 0.1% increase.  PMI Manufacturing Index is at 9:45 AM is expected to come in at a positive but moderate 53.2 reading.  A far more important number, ISM MFG index comes out at 10:00 AM.  It has been very strong this year, and that will continue if the consensus is correct with the expectation of 56.2 print.  Construction Spending is also at 10:00 and is expected to post an increase of 0.5, however, continues to be soft overall this year.

On the Earnings Calendar, there are nearly 280 companies reporting today.  The big news of the day comes after the close when AAPL reports earnings.  With the recent slide in tech, there are those saying the AAPL report is so important it may overshadow the Employment Situation number on Friday!  I’m sure about that but how AAPL reports will likely be critical to market direction.

Action Plan

The Bulls in the DIA managed to hold onto the morning gap but was unable to lift the other indexes.  The QQQ closed below support with a dark cloud cover pattern while the SPY held support but just barely.  IWM tested resistance early in the day yesterday but bears pushed back down confirming resistance but just holding on to the current trend.  So all and all we have 30 companies trying to lift the entire market and making very confusing signals overall.

The Dow futures are wildly bullish this morning suggesting a gap up more than 100 points.  The other index futures are also pointing higher but at this time are not reversing the negative candles left yesterday.  It’s my inclination to jump to the decision that the DIA this morning is an exhaustion gap which could signal the end of this rally.  However, it is always unwise to predict or bet against a strong trend.  My plan for today will be closely watching price action for clues of reversal.  I will stay with the trend until I have evidence of something different.  Watch the potential pop and drop or whipsaw price action this morning and prepare to act if necessary to protect profits and trading capital should a reversal occur.

Trade Wisely,

Doug