Another week, another rout of the bears. While we had an ugly day of distribution last Friday, it was basically erased by the bulls this week as the major indexes all rose steadily throughout the week. At this rate, we might as well start calling them cubs.
Once again though, I remain skeptical of the new highs we seem to be putting in daily on the S&P 500. While it is obvious that there is still a strong underlying bid in this market, there are still many key divergences that keep bothering me. Please realize that thanks to the modern marvel of QE2, we are currently trading in an environment that traders have never seen before. While I feel like a parrot for constantly yelling the same thing, I still feel that traders would be wise to remain cautious here and trade small while taking quick profits until the markets become better aligned.
Looking at a chart of SPY, we can see that even though we keep constantly pressing higher and higher on an almost daily basis, the fast elevators down to the bottom of the range have in fact pressed lower each time creating a broadening wedge pattern.
This is typically not what you would consider healthy consolidation and in fact is somewhat similar to the pattern we saw last year in May right before the “Flash Crash”.
Looking at the small caps as represented by IWM, we see that even though we have been able to overcome the ugly action from the last couple of weeks, IWM is presently forming a lower set of highs which is a clear divergence from the pushes higher the S&P 500 has been able to make during the same time. Also notice the spikes in volume during the days of heavy selling as opposed to the relatively ligher volume on buying days. This is yet another pimple on the market's face warning us that maybe things aren't as pretty as they appear.
Like I continue to preach, keep your trades small, your stops tight and take your profits quickly. If you do this, you will be smiling when we get hit with another day like last Friday.
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