Dow is trying to lead the market higher.

When I see the market gapping up to new highs, I always have the possibility of whipsaws or pop and drop price action in mind.  When I see the smallest index (Dow) gapping to new record highs trying to lead the market higher, caution flags start waving.  It could be a perfectly innocent bullish rally, but it could also be the perfect setup for a reversal.  It is so easy to get caught up in the drama of the morning and emotionally chase into the open.  If the rally is real, then we will see real buyers stepping up supporting the morning pop.  There is no reason to rush!  The price action will reveal itself if we quietly watch and patiently wait for the lower risk entry.

On the Calendar

We begin the last trading day in July with the Chicago PMI at 9:45 PM Eastern followed by Pending Home Sales Index at 10:00 AM.  The PMI number has been on the rise the last five months reaching a 3-year high in June at 65.7.  Consensus expects a pullback to 62.0 this month but still very strong.  On the other hand, Pending home sales have fallen for three months in a row.  However, the forecasters are calling for a strong 0.9% bounce back on today’s reading.  At 10:30 AM is the Dallas Fed MFG Survey is expected to continue to report strong results, but this number is unlikely to move the market.

Today begins a huge week on the Earnings Calendar with nearly 1500 companies reporting.  The week kicks off with 135 3rd quarter reports so please check the stocks you own or are thinking of buying.

Action Plan

Thursday and Friday last week did little but make the charts very difficult to read.  The DIA remained very strong reaching out for new record highs while the rest of the market tried to recover.  Although the SPY, IWM and QQQ’s rallied, they all closed the day below price resistance.   Even with the DIA rally, the VIX closed Friday well off of the lows suggesting a little concern may be creeping into the market.  This morning the Futures are once again indicating a gap up at the open to new record prints on the DIA.

I am always wary of gap ups to new market highs.  They are the perfect setups for whipsaws or pop and drop price action.  As a result, I will plan to allow at least 20 to 30 minutes after the market open before considering new positions.  I will need to see some actual buying after the professional gap.  Of course, the first order of business will be to manage the positions that I held over the weekend.  The overall trend of the market is still up so will continue looking for long trades, but I will also prepare for a reversal that could happen at any time.  Please understand this is not pessimism or bearishness!  It’s simply wise business to prepare.

Trade Wisely,

Doug