After a week of uninspiring price action, we are seeing a massive gap higher this morning that is sticking, thus far. Consistent with how the market has acted throughout 2011, both bulls and bears are being put to the test. My modus operandi is to block out the noise and emotion of the moment, and analyze where we truly are at this juncture. First and foremost, the bulls recaptured (for now) the key 1220-1230 area on the S&P 500. There is an array of bullish marubozu candlesticks being printed as we speak. Obviously, for the candles on daily charts we are going to need to see how this session closes. I would not be surprised to see the bears make a little push this afternoon to take things lower, but with the holidays approaching my sense is that the market is going to melt up on low volume and close at the highs of the session.
That said, all that has happened with the huge move higher today is that we are back to the midpoint of last Tuesday’s trading session. Beyond that, with the continued opening gaps it continues to be a difficult environment in which swing traders can put on high probability longs. The good news is that volatility is collapsing, as the VIX is starting to really come in here, breaking into the low-20’s. While the day-to-day gaps are highly dramatic and bring out the sharpest emotions in traders, in the grand scheme of things you will be better off blocking out the drama and focusing on whether the market is healthy underneath the surface. The best way to do that is by going through chart after chart after chart. In time, if the market truly is going to pivot towards a fresh uptrend, we will most certainly see it reflected in improved daily and weekly charts.
