The recent rally exceeded initial targets and has been quite robust. One way to measure the strength of a rally is by the closes. Over the past nine trading days there have only been two closes lower than the previous day’s close, and one of those was hardly a poor close. Friday did close down, but the morning selloff was quickly checked and the market responded with an afternoon rally — a generally bullish sign.
Another way to view strength is to assess how supply has been overcome. On June 1st, the market reversed and fell very hard painting a large down day. This set off the downdraft that followed into mid-June. On the recent rally, the market easily sliced through that supply, indicating strength.
So what lies ahead? There is certainly enough momentum to carry prices up to the previous highs at 1368 (basis the September contract). Higher prices beyond 1368 are a distinct possibility. We will watch closely how the market approaches the early May top if and when it does.
In the meantime, a pullback would seem reasonable given the overbought technical condition of the market and Friday’s response to the employment news. The first level to watch on any reaction is the 1326 level. A spring of this level would indicate a desire to rally higher quickly. It would not surprize me, however, to see the market pull back a little deeper into the 1320 to 1310 level. Going into this level would be a way for the market to test the June 1st supply to make sure it has dried up. A sucessful test of this level would be bullish for this market. Finding supply here would alter the current picture.
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