Monday's Move - Breakout Or Fake Out?

On December 31, 2013, the March S&P 500 Index SPY futures made an all-time intraday high at 1846.50 and posted an all-time high close at 1841.00. Keep in mind for investors not trading the futures, the corresponding levels for this day in the ETF equivalent is $184.69. During the month of January, the index made eight attempts to clear that level before it gave up and retreated to 1732.00 in early February. Over the next seven trading trading sessions, the index was right back at this critical level. Following another three attempts, the index cleared the major hurdle at 1846.50 in Monday's trading. What took place was a simple market phenomena of the market migrating “ towards the deck.” The “deck” being a cluster of Good-Til-Canceled (GTC) orders, where long-term players have placed orders. When the market is rallying, the orders are either “sell” to exit long positions or to initiate shorts, or “buy stops” to exit losing short trades or an attempt to join the momentum on the upside. When the market is declining, the orders are either “buy” to enter a long or to cover a short, or a “sell stop” to exit an existing long or an attempt to get short in a declining market. Related: NQ Mobile - Almost All The Way Back The market always seems to know and cleans out the deck. As evidenced by Monday's action, once the orders at the old high were disposed of, the index found few sellers, as opposed to momentum traders buying the breakout to new all-time highs. Once the sellers were cleaned up and many shorts threw in the towel, the index floated up another 10 points before finding resistance at 1856.75. Once the buyers were exhausted, the index quickly gave back 10 handles and closed near the former intraday high (1846.00). Now with the deck cleaned out on the upside, there is a new one forming on the downside. The participants being the new shorts who may be in the money from sells on Monday, or patient buyers not chasing the break out and waiting to purchase on a pullback. Tuesday's trading action is playing this scenario out to a 'T.' Early in the session, there has been a bit of seller's remorse at the closing the price (1846.00). Either Monday's buyers that are not so confident of the breakout or sellers who may regret missing on the selling opportunity during the blow off to new all-time highs. Without immediate follow through back into 1850 handle, selling intensified, as mixed economic data did nothing to reinforce the breakout to the upside. Instead, the index began to decline and was met with buyers attempting to cover shorts or new longs to enter the market. As they competed to the buy, the nervous shorts jumped bids and has nudged the index back to, you guessed it, 1846.00. So what is all this trading action telling us in terms of the deck? A new and much smaller deck is forming on the upside, with some participants bent on not missing out on another selling opportunity if the index once again returns to 1856.75, or “buy stops” to cover shorts or to initiate a long. Related: Five Star Stock Watch: BlackBerry Limited More likely, however, there is a much larger deck forming on the downside, the participants being the bloodied shorts who are attempting to lock-in elusive profits from shorts initiated on Monday. These players are competing with those who choose not to chase the market and are going to be patient and wait for a pullback. As in most cases, the impatient bears will get nervous and jump bids to cover. The bids will eventually get too stacked on the downside with bids and sell stops, and the market will migrate south and clean things out once again. And the process will begin anew. In order to determine whether or not this was a breakout or fake out, traders may want to focus on Monday's close (1846.00). Not only is this level an all-time high close, it was also in the area of the former intraday high (1846.50) that stood for almost two months. A close above that level will give confidence to the bulls that another leg to the upside is under way, while dealing another blow to the ones attempting to pick the top...again.