In the Battle for 1040: Bulls lead Bears 5-1

Confront them with annihilation, and they will then survive; plunge them into a deadly situation, and they will then live. When people fall into danger, they are then able to strive for victory.

–Sun Tzu

This morning markets are poised to open decidedly higher.  Premarket, the S&P is trading up 13 handles, or 1.24%.  This is despite the ADP Employer Services survey showing private sector losses of 10,000 jobs.  So far I’ve seen reasons the rally explained as “the markets expressing relief at seeing the calendar turn from August to September” to “China reporting a better than expected PMI” to “the bad jobs number proves we will get quantitative easing.”  None of these explanations seem right.

Why is it that we feel the need to fit a precise explanation for each “wiggle-waggle” in the stock market.  To me, today’s move had been building up over the past few days, as the market has battled with the 1040 level in the futures, and $104.30 on the SPYs (just a heads up, I will use 1040 in the S&P futures and $104.30 in the SPYders interchangeably).  Let’s start with a daily chart to see why exactly that level is so important:

Can the bulls win the battle for 1040?

In a battle, each side wants to control the higher ground.  Whoever controls that higher ground has a strategic advantage in waging their war.  Think of the 1040 level as that important level in the battle between Bulls and Bears.  On the daily chart, you can see 6 distinct instances in which the market either touched, or penetrated the level since the new year began.  All but one time did the market rally mightily off of the 1040 level, and in many respects, the Bears one push through that line looks far more like a trap than a true break.

On this latest brush with 1040, we spent far more time hovering above that ever-important line in the sand.  Since we spent nearly a week tangoing just north of the level, it’s worth taking a closer look by zooming into a shorter time frame.  Let’s look at an hourly chart of the SPY:

1040 continues to hold.

Two things are worth highlighting in this chart: first is the fact that we have opened several hourly bars right around the $104.30 level in the SPY and each time rallied strongly, and second is that if you look closely, before today’s large up move, we had put in two higher lows.  Yesterday morning, with the market trading lower right off the open we failed to even hit the $104.30 area, stopping right at $104.50.  After the release of the FOMC Minutes in the afternoon, Bears again tried to push the market lower and we made that second higher low before rallying aggressively into the close (a rally that continued even after the market closed at 4:00).

This hourly chart shows just the latest in what has been an ongoing battle with our key 1040 level on the S&P.  That second higher low had to weaken the resolve of the market’s Bears, and the strong buying into the close continued into overnight session.  With their backs against the wall, the Bulls were able to provide themselves with the cushion necessary to take the next move.  The gap up today need not be explained with any particular news catalyst.  The catalyst in and of itself is the fact that in battle, when one side holds impressively strong on the higher ground, and the enemy throws everything they can to take that land, at some point, the enemy needs to step back and reconsider their course of attack.  That “stepping back” is the waning of selling pressure, and the upward lifting of stock market prices.