It was not only S&P 500 that opened higher, rising throughout the premarket session. Importantly, high yield corporate bonds (HYG ETF) opened with a sizable bullish gap, taking it to the late-April and mid-May highs. In parallel, there hasn't been a breakout above these levels - and neither the S&P 500 has broken above the 61.8% Fibonacci retracement.
But we're dealing with a sizable bullish gap that makes a move higher later today likely. On the other hand, our expectations as to tomorrow's Powell testimony remain the same - i.e. a downswing in its wake remains likely.
Our stop-loss is above the mid-May intraday high, but a bit lower than the end-of-April intraday high. This level counts on the HYG ETF declining later today - and chances are, it won't decline in a bearish attempt to close the gap. At the same time, the S&P 500 isn't above the 61.8% Fibonacci retracement yet - and the stop-loss is positioned sufficiently far should the stocks' breakout get rejected before the Powell testimony.
As credit has been underperforming stocks recently, stocks don't have to spring higher immediately after the HYG ETF overcomes its highs. At the same time, a large part of the rationale for the short position has been taken away with the HYG ETF action so far. As a result, a reasonably tight stop-loss remains justified should stocks waver and not overcome the 61.8% Fibonacci retracement later on.
At the same time, buying a breakout attempt doesn't come without its own set of risks. It's unconfirmed yet, and we don't have an accurate view that closing prices coupled with volume provide. Should we be taken out of the market, staying on the sidelines while awaiting a suitable entry point from the risk-reward perspective, is justified.
In closing, today's market action so far has given more weight to the bullish case, and our scenario of a slow grind higher (discussed in today's extensive Alert) still seems most probable.
Thank you.
Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care
