Is Market Spike A Continuation Rally or Bull Trap?

After yesterdays rally the market continued to move higher in the overnight session, posing the question of how much more was left in the tank heading into today’s cash session.

That question was answered as the markets quickly picked up where they left off. As soon as the opening bell sounded, the markets promptly moved in tandem as the S&P 500, Nasdaq, and Dow raced towards the upside. 

The indexes jumped out of the starting blocks like a racer running the 100-meter dash. Ultimately, the gas in the tank ran out and the market coasted for the remainder of the session. 

Reports worth noting

There are two economic events that could impact the market tomorrow. The Automatic Data Processing (ADP) national employment report is scheduled to be released before the cash session opens at 8:15 a.m. Eastern, and the S&P services PMI is scheduled to be released at 9:45 a.m. Eastern. More details on these can be found here.

Today’s price action

The stock market moved just as anticipated in yesterdays article, Third Quarter Heats Up Quickly.

Our Trading Newsletter stated that the psychological target of 3,800 on the S&P 500 futures would be key today.

“For bullish sentiment to keep intact, the market will need to get above and hold 3,700 while maintaining the structure that could make this time different. If everything stays in place, the next significant level for the S&P is 3,800.”

In addition to the targets mentioned in yesterdays article, we highlighted some key indicators to help forecast todas price action. Those indicators will play a pivotal role in the direction of the market for the rest of the week. 

The game plan moving forward.

The 3,800 level is more interesting than usual because it has become more than just a psychological level this time. 

When looking at the S&P 500 futures chart, knowing where liquidity resides is critical in creating a proper trading game plan. The 15-day simple moving average (SMA), the 21-day exponential moving average (EMA), and the point of control (POC) level all coincide near 3,800.

When multiple levels of liquidity pool together, they often create areas of indecision as the big players on Wall Street are positioning themselves for the next big move. This is the explanation for the sideways action for the majority of today’s session. Today, the price action helped POC establish ground at 3,792.

For any significant move to the upside, the market is going to have to clear the 21-day EMA at 3,820. The chop zone will likely be challenging to trade if the market remains below this level. Leaning on the market’s internals and other key indicators, such as the Volatility Index ($VIX), can help anticipate breaking through the EMA.

As far as a move to the downside, the market will need to work its way back below the 15-day SMA at 3,779. During the cash session, Apple was relatively weak, showing the potential of being the first tech giant to sell as the Nasdaq also reached its liquidity.

Because the zone between the 15-day SMA and 21-day EMA are so tight, the cash session may open tomorrow above or below the area. Depending on where it opens, these levels can act as either support or resistance.

Market Holds Ground

The Nasdaq and the S&P 500 were positive to close the session. The S&P 500 futures closed up 3.01%, gaining 111 points, while the Nasdaq futures closed up 3.12%, a gain of 353 points. The Dow followed, closing up 2.65%, adding 780 points.

This marks the biggest 2-day gain since March 2020.