Needless to say, today's rally was a complete surprise. I still do not fully understand what all the excitement was about. I do know that volume was not that strong and NYSE breadth was moderately impressive, but not nearly as strong as one would think it would be after such a strong rally. Consumer discretionary names led the market higher, along with technology again. The sharp rally caused me to close by bear put spread positon on the SPY at a $1.04 profit per contract. Right now we have only 3 waves down from the highs put in last week, and the two downward waves are counted clearly as 5 wave moves. As of now, this could be just a zig-zag correction that has completed, and just a few S&P futures points shy of my 880 target I originally set out with. It's quite possible that today's action is the start of the next bullish leg that moves this market to new highs, or at least attempts to do so. With that in mind, caution is warranted, and I do not want to let good profitable trades turn into bad ones. A break of the wave B high of 923.25 in the S&P futures would put the immediate bearish count at severe risk because it wouuld confirm just a 3 wave move downward from last weeks highs. A 3 wave move is a correction, and therefore new highs on the year will be achieved. So I want to stop out of at least half my position on a break of 923.25 in the S&P futures.
I will close my remaining futures positions and the extra short ETF positions I picked up along the decline if the S&P futures break 923.25. I will maintain my covered call position on the SDS as that is a long term income yielding position.
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