the week in crayons

Although we only had four trading days this week, they were packed with enough action to satisfy even the most degenerate action seekers. While Tuesday's action was positive across all the indexes, it was marred by the volatile day in Apple as it gapped down on news that Steve Jobs was taking a leave of absence due to his health, but rallied strongly throughout the day as the buy the dip crowd jumped in and drove the stock up sharply into earnings that afternoon, and actually made new highs after the close. However, along with the broader markets, it sold off sharply throughout the rest of the week and perfectly illustrates the growing dichotomy in the market presently as the bulls and bears each wonder who has the initiative. While APPL is technically still healthy as it is above the base it broke out of this year and its rising 50 day moving average, it would take a stretch of the imagination to view this week's candles as positive.

This divergence in the markets began to show itself last week with the relative weakness in the Russell 2000 small cap names as opposed to the less risky names in the S&P 500. The “risk off” trade continued this week as the small caps showed considerably more weakness than the more defensive large caps. We can see this clearly by examining the charts of both SPY and IWM.

 

While SPY was able to remain within its most recent “stair step” consolidation range despite the weakness in the markets this week, IWM continued to display classic topping action as its volatility sharply expanded while dropping through several levels of support. While many will point to the SPY chart and say it has done nothing wrong and is technically still in rally mode, the IWM chart is not healthy in my opinion which leads me to believe that the market is setting up for either a broader pullback than what we have experienced so far or a wide range consolidation similar to what we experienced last summer. The market is now at a crossroads, but to make matters a little more interesting, we're at a crossroads in one of those countries that have yet to come up with the bright idea of street lights.

The bulls find themselves wondering if they are supposed to keep going while the bears that have been shell shocked for several months now dare to dream that they may have the right of way now. So what do the bears do now? Do they step on the gas or chicken out like they have so many times throughtout the current rally? One thing I know is that I will not attempt to cross this street until I see exactly what pattern the traffic is going to take.

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Posted in General Trading