The Week in Crayons

How ironic is it that I used a picture of a clogged up road in Cairo to describe the market during last Friday's episode of The Week in Crayons? While we spent most of the week roasting the bears that stepped into the market short on last week's distribution, the market used the news of civil unrest in Egypt to pull the rug out from under the overenthusiastic bulls on Friday.

So now we have a molotov cocktail of trapped bulls and trapped bears stuck in a market that is thoroughly confused as it tries to sell off in this pomo laden environment. One thing about molotov cocktails is that they are just as likely to burn the thrower as the target and as such, I highly recommend that traders sit out here if they are uncomfortable trading or don't know how to properly protect themselves in this type of environment and wait for better opportunities once the market figures out where it wants to go from here.

A chart of SPY show us just how ugly today's action was for the bulls. After breaking out of our most recent “stair step” on Wednesday and inching higher on Thursday, the bulls were punished mercilessly on Friday as oned day of selling quickly erased the climb higher that had occurred over the last six days. Looking at the heavy volume on the days that we have sold off sharply lets us know that the market is experiencing strong selling pressure at these levels and is likely to head lower until it finds enough buyers willing to step in. However, trends are not broken in one day and I would not recommend shorting now as we still remain in an uptrend in this pomo driven environment.

Examining a chart of QQQQ shows us the same ugly action as that in SPY. After making marginal new highs on Thursday, QQQQ swiftly cut through several days of positive action as it sliced through several levels of support. It now finds itself below its key 20 day moving average as well as an ascending trendline that has supported this rally for several months now. Keep in mind that QQQQ still remains above 2008 highs, and should find support as it drops down to these levels.

Demonstrating the fear that gripped market participants on Friday, gold and the dollar traded in tandem higher as the markets dropped. This typically is a sign of a flight to safety as investors flee from riskier equities and jump into the relative safety offered by the dollar and gold. Looking at a chart of GLD which tracks the performance of gold, we can see an apparent triple top just under $139 followed by a heavy selloff through multiple levels of support. It bounced strongly at $128, and should run back to test the low $130's if fear continues to run rampant in the market over the next month. Gold has moved in sympathy with the markets for over a year now as the market has been driven by inflated prices from the Fed's monetary policy, but has recently begun to diverge from this correlation. Watch to see if gold continues to trade against the market as that is a good clue that the nature of this market is changing.

With the markets now in a state of flux, I recommend traders play it safe and either get flat or trade lightly and hedged until we see better opportunities.

If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member.

Posted in Commentary