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I believe the key to this market will be in how the SPY trades from here as a proxy for the market. The SPY is currently range bound after the gap up day. While the DIA and QQQ ETFs have both undercut the lows of the gap up day while the SPY has not. A powerful gap up after the fiscal cliff resolution that has not retraced is very bullish. I bought the reversal candlestick day before the gap up in my long term investment account and I am now using a close below the gap up day as a stop. As you can see the SPY has been range bound for the past 8 trading days in a $145 support/$147 resistance price box. A close above these levels will be an opportunity for trend traders to take break out longs looking for a new leg up or a close below support will be an opportunity for shorts to see if the market breaks down to fill the gap.
I am currently overall bullish and will stay that way until this near term support is lost. Recently we have had the most capital in flows of capital into stock funds that we have had in ten years and unlike other times where this has marked a peak it is the first time in a long time that there was truly positive inflows. With low yields and the bond market crowded along with no interest in CDs the logical choice is the stock market.
But of course we have to let the price action be our guide in the overall market and in individual stocks. Let’s take price action one day at a time. We don’t have to be Nostradamus to make money in the markets we just have to follow the chart and trade the market we are in as it unfolds.