After QE2, How Much Higher Can the Market Climb?

Since the Federal Reserve announced a $600 Billion dollar plan to purchase US Treasuries, the markets have been bought up with little hesitation. The question is, will the buying continue and how high can the markets climb? First, you have to respect the bullish market sentiment. There are not yet any signals that suggest entering a swing short position. Friday was essentially a consolidation day following the extreme buying that came in at the end of the day Wednesday and all day on Thursday. The key is to identify resistance levels and take short positions in those spots. It is best if you hold multiple contracts in these situations so that you can take quick profits while letting the remainder of your position run in case the selling continues. If selling doesn't continue, you have the opportunity to cover for break-even if the trade comes back to your entry. If the trade goes against you, you can likely get out when price retraces back to your entry.

I don't expect any significant selling to come into the market before the end of the year. We will likely continue to make minor new highs and see a lot of choppy consolidation. There will be plenty of opportunity to be both long and short. I do expect a retracement back to 1198-1200 (ES) this week so I will be watching for a good opportunity to get short to attempt to catch that move. One level I like on the ES is 1127-1129. If we see excess supply at that level, I will look to get short. The key is to make some small profits and buy yourself a stop; that way you give yourself a free opportunity to catch a runner back down to last Wednesday's closing price point. If the ES trades through 1127-1128 without resistance (which is extremely unlikely), it is still a safe place to get short given that price will likely come back and allow you to get out for at least break-even. The key is that you get short on the first test. The more times price tests that 1127-1128 price, the less likely the resistance holds.

The Fibonacci Argument:
The S&P 500 Cash Index came within $1.66 of the key 61.8% Fibonacci retracement to the October 2007 highs from the March 2009 lows. The Dow already has two consecutive daily closes above the 61.8% Fib level. This is a technically bullish indicator. However, the S&P holds more weight in terms of market sentiment, so we'll wait to see if the S&P Cash Index (SPX) can get a daily close above 1128.74 before assuming the market can continue its buying momentum. That is about 1125.75 on the ES.

So, on that note, I like any shorts in the 1124-1128 range on the ES. Just watch the tape and look for the best entries in that price zone and it is a pretty safe short bet. In this bullish environment, just be careful defending any short entries. I also can't argue with buying the down-ticks. If the ES trades back below 1200, I will be a confident buyer in the 1196-1200 price range.