With Friday's strong action, the markets once again swung sharply in the other direction after sucking in traders expecting a nice follow through after Thursday's high volume selloff. Instead, the bears found themselves victims to yet another trap as Friday's gains pretty much erased Thursday's drop, While the argument can be made for either a continued bounce here or a drop back lower, the reality is that we continue to chop around wildly in no-man's land, with bulls and bears both getting trapped every other day it seems.
Looking at a chart of SPY, we can see that the market continues to send traders mixed signals as it attempts to normalize after the the huge run its had over the last several months.
The unhealthy nature of this market is evident if we look at how often it has snapped back after a strong move and reversed on traders expecting continuation. Today's action continued this pattern. While we successfully held the 50 day moving average today, we still find ourselves on the wrong side of the recent wedge that we've been consolidating in and arguments can be made for both bulls and bears.
As I keep reiterating, now is not the time to gamble and traders would be better served to reduce risk as much as possible until we see better opportunities. Keep in mind that we've had a nice trend for several months now and traders are being unrealistic if they think a couple of weeks of choppiness is enough for the markets to consolidate. Looking at a weekly chart of SPY, we can see the near vertical rise we've had since we broke out of the broad range consolidation we were mired in for most of last summer after the “flash crash”.
Looking at this longer term picture, we can see that we have really just begun to flag on the weekly chart and have plenty of room to the downside before the “healthiness” of this uptrend is truly threatened. While we may continue to consolidate in a high and tight flag over the next few weeks, there is just as likely a chance that we continue to probe lower and test support at $128 and possibly even the last major pivot high at $123 as we enter a broader range of consolidation much like the one from last summer. Of course, keep in mind that with the Jekyll and Hyde nature of the recent market, we can just as easily rocket upwards to new highs, which illustrates why traders are better off waiting in cash or trading very lightly until the the market offers them a better edge.
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