Schaeffer's Trading Floor Blog

Why Fading This Impressive Rally Makes Sense

Schaeffer's Equities Analyst takes a cautious approach to today's broad-market surge higher

by 6/29/2012 2:11 PM
Stocks quoted in this article:

Overnight news about the recapitalization of Spanish banks has sparked a furious rally, with equity indexes currently up 2% across the board. Since the opening gap higher, we've seen steady buying/short covering in all sectors. In fact, stocks are on their highs as I write this. Although this is a very impressive rally -- and the news out of Europe is a potential game changer -- in my opinion, the correct trade at this juncture is to take profits on long positions and/or initiate new shorts to offset any weekend gap risk.

Below is a chart of the S&P 500 Index (SPX). As you'll see, the rally today has been furious, but we're trading into the key 1,360 level on the index. This served as support in April, and capped the rally earlier this month. In addition to this, the 80-day moving average (white line) is currently right overhead. The markets have respected this trendline very well, going back to late last year. (Click the chart below to enlarge).

Click to Enlarge

While this move looks explosive, and could potentially have legs to the upside given the recent shift in market sentiment, the prudent move here is to take off some long exposure. It is very probable that we continue higher, but given what's overhead, the risk/reward tradeoff lies with the bears here.

Some of the rally this week could be attributed to it being both the end of the month and the end of the quarter, when funds mark up their books in order to window-dress performance numbers. Should the steady inflow of capital that we've seen this week sputter into next week, there will definitely be some low hanging fruit for the bears to grab.

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