Market Back In the Range. Could Challenge the All-time High. Wait For A Breakout

Posted 10:00 AM ET - The market is stuck in a trading range and this is a very low probability environment. Support at SPY $185 was tested last week and it held. We need a breakout/breakdown and follow through. Until we get that, keep your size small or stay on the sidelines. Friday the market surged higher on the open. A snapback rally from relative lows typically produces a sustained move. After two hours of trading, the bid started to weaken. Stocks gave back most of the gains and it looked like we might finish lower. This price action suggests that some Asset Managers are taking profits (reducing risk). Bonds do not typically rally during tightening. The taper continues and Janet Yellen said that a rate hike could be a year away. The current rotation into bonds could be a warning sign (flight to safety). By historical standards, option implied volatilities are cheap. However, they have moved off of their lows and they are maintaining this level. That suggests that some hedging is taking place. From a technical standpoint, the market has staged a series of big reversals at the SPY $187.50 level. This is a sign of exhaustion and resistance is building. This rally could be in the ninth-inning. Official PMI's will be released tomorrow. The US and Europe will be decent. China could fall below 50, but fiscal spending programs are keeping hope alive. This is a busy week for economic releases and good news is expected. ISM manufacturing will be released tomorrow and the consensus estimate is 54. That would be a strong number. ADP will be released on Wednesday and it will reveal private-sector job growth. It has outpaced the jobs report in recent months and it should be "market friendly". Initial jobless claims and ISM services will be released on Thursday and the jobs report will be released Friday. Temperatures are on the rise and traders are expecting improvement. The bad weather excuse is getting old and we might finally be able to gauge economic activity. The market could make a new high this week, but I won't be participating to any large degree. At best, I will day trade. China's stimulus won’t result in growth for a few months and activity will continue to slip. Traders will start wondering if it is "too little too late". We have gone a few weeks without a shadow banking default and the problem is growing. One or two new bankruptcies will spark fear. The ECB is considering negative interest rates to stimulate spending. They are worried about disinflation. Japan will raise it sales-tax from 5% to 8% tomorrow. Consumers will purchase ahead of the hike and that could be pushing sales forward. Current conditions are weak and they might be even worse than they look. Brazil's debt was downgraded two notches last week and it is just above junk. This news was completely discounted. Russian troops are increasing along the Ukraine border and tension is running high. There were plenty of IPO’s last week and they did not go well. This is new supply and it will take time to absorb. I see plenty of headwinds and I believe we are setting up for a "sell in May and go away" scenario. That means any breakout will be short-lived. The price action looks good this morning, and “Fed Speak” is helping. I will by puts if we close below SPY $184. I could be waiting for a long time for that trigger. If the market rallies above $188, I will move my put buying trigger to that level. Earnings season starts next week and that will attract buyers. The price action this week should be bullish, be careful. . .

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