Rally Still On Track, Big Test At 850 Coming Up

Today’s explosive upswing – 54.5 points or 7.1% on the S&P 500, and about 500 points on the Dow – comes as no surprise. The 850 level on the S&P is one of the strongest energy levels under 1062, and is a very strong attractor/repeller level. That means stocks will be attracted up to it as a resistance level, or if the S&P can climb above it, back down to it as a support level for retests. However, it also means it acts as a repeller as stocks get close, and it takes a lot of stored-up energy from negative or neutral investors caught on the wrong side of the move to get through it.

Another upturn in the next day or two just half as large as today’s move will put the S&P almost exactly at 850, so this is a very crucial test coming up. There are four possibilities:

1. The S&P sails right through 850, a very bullish outcome that puts 1062 on the table as the next big target

2. The S&P stalls just under 850 and consolidates there for a week or so without a big retracement – another bullish outcome

3. The Index takes a sharp drop back to a successful retest of 750, scaring the heck out of the nascent bulls and reinvigorating the bears (imagine how much “easy” money the put buyers lost today!). That also would be a bullish outcome because the slingshot rally from 750 would make today’s run-up look like an appetizer.

4. The Index drifts lower or has a sharp drop, 750 does not hold, and we are back in the soup – the only bearish possibility, and a very unlikely one.

Our market strategy is working so far. The odds are very high that we are in a multi-month, strong upturn. If inflation takes off, as both gold and oil prices are suggesting it will, we may never see the recent lows again in nominal terms. Financial history shows that stocks are a good hedge against high inflation. If we stay in a low-inflation environment even with the dollar dropping, I still expect another leg down to even lower lows than we have seen so far. But for now, enjoy the rally, let’s watch which stocks respond and which don’t, and get ready to concentrate your portfolio in those few stocks that can build great wealth in the very volatile investing environment that is coming later this year.