A Breakout Above SPY 129.50 Could Gain Traction This Week!

Today, the market is following through to last week's rally. The SPY has broken out above short-term resistance at 129.50. The Chinese market was down 5% overnight, but that did not impact global markets. European markets were all trading higher. The economic highlights this week include the CPI. I don't believe it will weigh heavily on the market since last week's "hot" PCE deflator was taken in stride. As long as commodity prices continue to decline, inflation worries will be subdued. The Russian conflict in Georgia has not impacted oil prices. That region accounts for 1.3 million barrels of oil per day and a disruption could lead to higher energy prices. After an initial rally this morning, oil has retreated and it is below $115 per barrel. This price action reveals selling pressure. The earnings front will be dominated by retail stocks. The rebate checks have been cashed and that stimulus has ended. Retail stocks have held up relatively well and I feel they are prone to a decline if the guidance is weak. The path of least resistance is higher this week and option expiration could have a positive bias since the market is at its one-month high. Option traders will leg out of hedged positions, effectively "goosing" the market. This will only take place if a steady rally materializes. Many traders will be taking the week off before their kids return to school. At this juncture, the market is pointing higher. Stick with biotech/healthcare and use trailing stops. The closer we get to SPY 133, the more vulnerable the market is to a pullback. Short covering should continue to fuel the rally for a few more days.

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