The Week in Crayons

The markets broke out firmly on Friday cementing the fact that the trend is clearly still up. While several divergences had appeared throughout the last couple of weeks showing some underlying weakness, most of the lagging indexes have played catch up all week and are now standing at new highs. Obviously, any and all dips are being bought vigorously right now and traders should continue to take shots to the long side until the dips stop being bought. One thing to note however, is that as the market continues to run up, there are less and less quality setups emerging. It is important that traders remain disciplined in the trades they choose to enter and not chase moves that have already occurred.

As we examine a chart of SPY, we can see that the trend actually accelerated as we rocketed above the broadening wedge that had defined the action prior to this week. This is a sign that many are chasing the move up, and although the markets have shown great strength over the last several months, the potential for a swift drop is very real as price chasers are usually the first to dump their shares on a pull back.

The small caps as represented by IWM have overcome the relative weakness that had developed over the last few weeks and are now well above their previous highs. IWM formed a sneaky cup and handle(ish) pattern and were able to breakout strongly on friday. Keep an eye on the small caps as they have been a good measure of risk appetite throughout the current rally.

As I said earlier, the trend is clearly up and I feel that shorting this market is an exercise in frustration right now. The plan remains to be patient, wait for long setups to develop and hit them hard and fast when you get them.

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Posted in Commentary