The Week in Crayons

The markets experienced another bout of heavy distribution this week, this time under the guise of the unrest in Egypt Libya and the resulting spike in oil prices. While the markets were able to find support as the dip buyers stepped in on Friday, they continue to encounter heavy selling after slowly dripping to new highs. The recent pattern of forging to new highs followed by fast drops to new lows is becoming eerily reminiscent of the action we experienced last spring just before the flash crash. Although the current trend remains up and should be traded thusly, it certainly doesn’t hurt for traders to have contingency plans ready in case the markets have another precipitous drop waiting in ambush. As the philosopher George Santayana famously said, "Those who cannot remember the past are condemned to repeat it".

Below we can see two charts of the S&P 500 index. One is the period just before we had the flash crash in May of 2010, the other is of the recent action we have experienced.

Can you recognize which chart is which? As we can see, both are forming very similar broadening wedge patterns and show an uptrend marred by heavy distribution.

While a black swan event like the flash crash is usually a “one of” event, it did lead to a broad corrective range that took months to sort itself out. I suspect we will likely enter a similar situation as we move forward, but will continue to respect our current trend higher until we have a clearer picture of where the market wants to go. However, I highly recommend that traders Be Prepared™ for whatever the markets decide to throw our way.

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Posted in Commentary