Given the recent history of the market rallying sharply short term after a VIX spike above its upper Bollinger Band and a spike down in the NYMO, combined with the upward market bias heading into the FOMC announcement, there's a good chance the market will move up into that announcement tomorrow afternoon. If recent history is a good indication, the market also should continue higher over the next few days.

As expected, the market rallied into the FOMC announcement, and then continued higher the next 3 days. In the 4 trading days since our last post, the Dow has rallied over 450 points, making a new 52-week high. The S&P 500 hasn't yet made a new 52-week high, but is within 8 points of one and broke the September high.

Gold bulls will want to see a successful back-test followed by a breakout to new highs


It took less than a week for gold to rebound and break out to another new high, with a strong $25+ rally Tuesday despite the U.S. Dollar moving higher on the day. Silver also rallied strongly, up over 4% Tuesday alone. The precious metals had been moving inversely to the dollar, so Tuesday's strong move higher in the face of a stronger dollar could bode very well for continued strength even if the dollar rebounds.

As we said last month, "The precious metals could be in for an extended rally period on this breakout. If so, the miners should be in for a strong bull move."

In other commodities, gold has been consolidating around the 1000 level recently, threatening to take out the all-time high of 1,033 from early last year. If it holds the 1000 area and pushes through to new highs, the bull trend will continue, with a target in the 1300 area from the inverse head and shoulders pattern formed since early last year. A breakout in gold should also send silver much higher, with silver needing to more than triple to reach its all-time high. Adjusted for inflation, the all-time highs for both metals is much, much higher.

Since we posted that a week ago, gold has dipped below 990 4 times intraday, including Friday, only to close above that mark each time. Friday's reversal off the morning dip and close above $1000 is very bullish action, and could portend a push to take out the all-time high.

This updated chart of the TICK 10-day EMA shows that, with today's breakout rally, it has moved well above 700, much higher than any reading in the last couple of years. If we get a short pullback like the last 6 times it peaked over 600, the second day could again be a great buying opportunity.

If the next pullback holds the 950 area, or even the 927-930 area, it would be bullish for a continued rally to higher levels. Given today's Dow Transports confirmation of the Dow Theory Bull Signal, we'll see next week if indeed such a pullback proves to be a great buying opportunity.

Despite the breakdown, the May 15 low at 879 has continued to hold on a closing basis. That's 4 straight days now the SPX has closed between 879 and 882. If the powers that be can continue to defend this level, those who have shorted based on the now widely reported Head & Shoulders pattern may get squeezed. If it breaks down, though, we may see some significant selling...

As expected, the action Monday was strong after last week's narrow trading range. Last night, S&P futures came within 0.25 points of last week's low (corresponds with 869 SPX), but buyers came in and defended that level. Later, in regular trading, buyers rushed in when 888 resistance was taken out, pushing the SPX over 901 at the close, with futures over 30 points higher than last night.

The next thing to watch for is either a decisive break of the June lows (the S&P 500 briefly dipped below 888 Friday morning -- the May 15 879 level is also support) or a breakout from the 927-930 resistance area. Given the VIX signals from last week and some other technical indications of a market shift, there's a good chance the next break will be down after this bounce is over.

However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.

As we said last week, "Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move."

After Tuesday's small NYMO change day signaled a big move day coming, the big move came on Thursday, as the S&P 500 moved sharply off its lower Bollinger Band and powered up toward last week's high. Now, the market is near a key resistance area, and how it reacts to that resistance will likely determine the direction of the next big move.

If the S&P 500 can break through the resistance in the area of last week's 927 high, it should make a push toward the 956 high of the week prior. Earlier in this rally, such an up move would have been a given considering next week is month end, quarter end, and a holiday-shortened week. However, there are indications that a market shift is taking place...

While the S&P 500 had a nice rally of about 20 points from Thursday morning's low to Friday morning's high, it was not really the big move in one day that has usually occurred recently after a small NYMO change day. With the somewhat muted reaction to this indicator so far, we're looking for a potential big move day on Monday, the first trading day after quadruple witching expiration.

Whereas on Wednesday we were looking for a move up, which we got, we're now leaning toward the next big move being down. The lackluster rally in response to the NYMO indicator could portend a down move, though it's hard to tell if quadruple witching expiration had an effect.

With a small NYMO change Thursday, there's a very good chance the market will get a sizable move within the next couple of days.

This indicator doesn't indicate market direction, but after 3 straight down days in the S&P 500, and after today's doji candlestick and bounce at the 200-day moving average, odds would favor an up day. However, if the 200-day moving average breaks, the big move could be down. Either way, we'll be ready for it.

As our Gap Up Trader expected, the S&P futures did trade higher, and significantly so, during the hour before the open after a lower than expected number of job losses were reported in the May unemployment report. The automated strategy took very nice profits right after the report came out, spiking S&P futures well over 10 points higher than Thursday's close.

Despite the major market indices ending near unchanged, it was a very nice 10%+ day for our automated futures trading system, led by the big US Dollar rally (we added US Dollar futures trading this week as we expected a reversal from the downtrend to an uptrend).

One of the strategies in our automated futures trading system is a gap up trader. Below is the equity curve for this strategy for June E-mini S&P futures:

This is an unusual equity curve, as there have been no losses since the June futures became actively traded. After today's gain, it now has had 19 winning trades in a row during this strong rally period.

This chart shows why our trading model shorted the Nasdaq 100/QQQQ Wednesday near the highs.



While the other indices remained well off their highs of last week, the Nasdaq 100 was retesting its highs, with strong resistance keeping it from breaking out. One of the best technical sell indicators is a failed buy signal. This 15-minute chart of QQQQ shows the clear bullish cup & handle pattern that failed to break out. This market has been extremely resilient, but normally this setup at the highs would signal more downside ahead.

The big down move day came Monday as expected . This chart shows that Monday was the biggest down day since the rally started, and the second 9-to-1 down volume day:

A couple of more indicators pointing to a pullback soon are Insider Sales and Newsletter Sentiment.

This Insider Sales Ratio chart (from Barrons) shows a huge spike in insider sales:
This article by Mark Hulbert shows that bullishness among newsletter writers has increased significantly over the last couple of weeks despite a minimial increase in the market averages. He calls it a "crumbling wall of worry," which is not a good sign for market bulls for the short term.

As we showed on Thursday , this entire rally has been one huge rising wedge, and there have been a number of different rising wedges within this huge rising wedge. Here's a 15-minute chart of the SPX rising wedge since late March:


The circled area on the right is the rising wedge that formed over the last 3 days. Here's a close-up chart of that wedge:

With April options expiration, and Friday marking the end of the 6th straight up week (wouldn't have been with a decent down day), as well as 875 SPX resistance so close to being hit, Thursday was a day to test that resistance and push the technical indicators a little bit more to the extreme.

We think Monday will be a big move day. A small change in NYMO Friday indicates a big move is coming, so we expect a big move early next week. Also, the Monday after expiration has had big market moves recently.

The below chart shows why we closed out our positions:



We had anticipated a breakdown from this Head and Shoulders pattern, but the breakout Thursday morning above the head nullified that pattern. It was a nice setup, but it didn't work this time.

We said on Friday, "We'll show this weekend why we expect a more significant pullback soon." The weekend was hectic, so here are the updated indicators, with Monday's action included:

This daily SPX chart shows that Monday was the first 9-to-1 volume down day since the rally started, following several 9-to-1 volume up days:

With the Dow selling off over 300 points from the high to the low Wednesday, and then bouncing back to close only 113 points off the high, it was a crazy day. Our trading model covered shorts, holding the SPY puts bought earlier today in their place. Even with the market recovery, the puts bought earlier are still up over 17%, and will act as downside protection when we go long, likely on either another pullback or a breakout of today's highs.

Here's a 1-minute chart of Wednesday's action, showing why the lower high just after noon was a great short entry and then why the 3:00 panic selling was time to cover shorts: