EC Signs Of A Fake-Out Rally?

Last week, I said that a new short-term uptrend had started on Friday, May 7, but that was a bad call. However, a week later on Friday, May 14, a new short-term uptrend has started - although it is not yet confirmed by some of the important indicators. In other words, watch for signs that this is another fake-out rally.

On Friday, May 14, the major indexes all closed above their five-day averages, which is the first requirement of a new uptrend. 

Looking back to Friday, May 7, you can see strong, new high closes for the SPX and the Dow, but a weak doji close well below a new high for the Nasdaq. It is very difficult to believe a market is trending lower when two of the three averages are closing at new highs, but then again, such weakness in the third average is a bearish divergence. So, it was a judgment call.

I was very surprised by the negative reaction on Wednesday to the inflation report. I was expecting the market to be prepared for it. On CNBC, the point was made in the fall of 2020 that people were buying the post-COVID-19 stocks in anticipation of reopening, which implies higher prices, doesn't it? But it doesn't matter, my job as a trader is to just roll with whatever the market has to offer.

I was happy with the way I executed my trading plan during this past week (after being unhappy with myself a number of times during downdrafts earlier this year and last year). I just held onto positions unless they stopped me out, and fortunately only a couple triggered sells.

In the past, I would have moved aggressively to cash and waited for the next signal to buy, but I just don't have it in me anymore to trade so frequently and to get in and out of the market like that.

The triggered sells were in the home building group, and it surprised me that these stocks took such a hit. But now it is making more sense, considering my positions were extended a bit and the higher cost of materials, labor, and interest payments created a headwind for earnings. My guess, though, is that the selling in this group is temporary. Maybe people needed an excuse to take profits. I'll get back in if the relative strength of the group tells me to.

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Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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