Early Wednesday morning I penned a “Quick Take” discussing the breakout of the two-month long consolidation process. To wit:

“The bulls are ‘attempting a jailbreak' of the ‘compression' that has pressured markets over the last two months. 

This breakout will provide a reasonable short-term trading opportunity for portfolios as I still think the most probable paths for the market currently are the #3a or #3b pathways shown above.

If we get a confirmed break out of this ‘compression range' we have been in, we will likely add some equity risk exposure to portfolios from a ‘trading' perspective. That means each position will carry both a very tight ‘stop price' where it will be sold if we are wrong as well as a “profit taking” objective if we are right.”

On Thursday, that “jailbreak” occurred with a move above resistance and the previous closing high downtrend.

From a bullish perspective there are several points to consider:

With the market close on Friday, we do indeed have a confirmed breakout of the recent consolidation process. Therefore, as stated previously, we reallocated some of our cash back into the equity side of our portfolios.

From a bearish perspective the are also several points to consider:

As I noted in last Tuesday's update:

“Despite the recent corrective process, investors still remain primarily allocated to equities as shown by the Rydex allocation measures below. With the market testing its longer-term bullish trendline from the 2016 lows, Rydex Bear and Cash allocations remain at low levels while bullish allocations have not fallen much from their recent highs.”

What is clear is there was actually very little “capitulation” by investors over the last couple of months which potentially limits any advance in the markets from current levels.

But, while “everyone loves a good bullish thesis”, let me restate the reduction in the markets previous pillars of support:

“While there have been several significant corrective actions since the 2009 low, this is the first correction process where liquidity is being reduced by the Central Banks.”

Be Careful Where You Step

As I stated last week:

“In reviewing our three primary pathways above, pathway #3a and #3b remain the most viable currently.

• Pathway #1 is the most bullish of potential outcomes. With earnings continuing next week, and short-term conditions mildly oversold, the market is able to push through resistance and rally back towards old highs. (Probability = 20%)
• Pathway #2 is the most bearish with the market failing at the cluster of overhead resistance once again but this time violating the 200-dma. This decline begins a process of a deeper correction as we head into the summer months. (Probability = 30%)
• Pathway #3a and #3b suggest a further rally to the 100-dma, a pullback to the previous downtrend and then either an advance that breaks above the 100-dma and begins a more bullish rise, OR a failure and another test of the 200-dma. (Probability =50%)“