I've been staring down the gun barrel of this rally since late 2009. I've traded counter-trend and with the trend on and off, all the while trying to stay rational and objective while still making the occasional extreme bet against weak internals. Yesterday was the first time I wondered if it was truly melting up.
Melt ups are rare in the stock market. They're more akin to commodity markets which make spike highs on acute fears of shortage. Stock markets make spike lows on acute crash fears of price going to zero.
With a closing advance/decline ratio of 4.75/1, yesterday either represented frantic short covering or a possible kick off to a melt up.
Even so, futures may have double-topped last night, and any new high in the cash S&P today should be achieved with a less impressive A/D ratio, but it is clearly seller beware until confirmation comes to the down side. Confirmation could be marked by the return of significant internal weakness as price makes higher highs, but would probably require a breathtaking break of 1737.92 with five clean waves down.
I left money on the table by dumping the second hedge yesterday (SPY calls), and only added a little VIX using April 16 calls. UVXY and the UVXY calls are still positive.
There is a Fib extension target at the 1877 area. A pullback into the 1860-1865 area could be expected. Below 1834.44 could test 1800.
The bigger target is the weekly Fib extension at 1887.
For now it's business as usual: play the dips and the rips. But in order for me to play the rips, there has to be divergence. And yesterday there wasn't any. Patience is required.