The markets capped a wild week of trading with an ugly day of selling that was somewhat alleviated by a last minute surge. As I said on Wednesday, we are stuck in the middle of no man's land in the broad market indexes, and it seems like bulls and bears are taking turns trapping each other every other day. This is not a good time to be blindly involved in the stock market, and most traders would be better off moving to strictly cash and waiting for better opportunities.
As we can see on a chart of SPY, the market has thrashed up and down violently after being rejected around the price of $135.
We have now found support at $130, but are having trouble as we approach $134, creating a wedge pattern as we continue to come to terms with this price area. The trend remains up, but note the huge volume on down days. This is a clear warning that institutions continue to dump shares as as we approach our near term ceiling. The next levels to watch on either side of the short term wedge we are in are $135 and $128. Keep an eye on oil, as we will not be able to rally as long as price continue to surge higher.
Looking at a weekly chart of the United State Oil fund (USO) we can see that oil has clearly broken out of a multimonth channel. Notice the rare “distraught dictator candle” we formed this week on huge volume. This type of candle usually precedes a parabolic move, and I would not expect oil prices to alleviate until the turmoil in the middle east calms down.
With the markets chopping around in no man's land right now, I recommend traders either sit out, or if necessary trade lightly and very nimble until we get a clearer picture of what our new direction will be.
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. If you aren't a member, what are you waiting for?