The Week in Crayons

For a few weeks now, I've been pointing out the mixed signals the markets were giving us and the potential scenario that we were now in a broad trading range as the markets attempted to consolidate the massive gains we've experienced over the last several months. While its fairly easy to assume that the top of this range will be the highs we experienced in early February, the bottom of the range is another matter all together. Amid fears of a near apocalyptic disaster in Japan, the markets experienced the first real test of just where dip buyers would step up in force. Looking at a chart of SPY, we can see that bulls heavily defended the $125-$126 area earlier this week and were able to finish the week above the key low price of $127.51(barely) we made during the crisis in Egypt in late January.

Price action remains weak, and a retest of this week's lows is likely. If we cannot hold it, the next key level of support on SPY will be around the $121 level. Our near term ceiling would be just underneath the wedge we broke down from earlier this month around $130-$131.

Compared to SPY, big tech as represented by a chart of QQQQ was relatively weak as it was unable to hold above its Egypt lows this week.

It is currently flagging underneath its 100 day moving average and has been a notable laggard over the last couple of weaks. Keep an eye on QQQQ as either a continued breakdown or a reversal upwards will likely give us good clues as to where the broader markets want to go over the next month.

While the tech companies have shown relative weakness, the small caps as represented by IWM have shown relative strength by holding up well during our recent downslide.

In fact, they have yet to breach the key Egypt lows and remain well above them.  The resilience in the small caps as opposed to the weakness in tech is yet another set of mixed signals the market is giving us that we are still in no man's land.  One scenario to watch as we chop around further is a failed retest of the $81 level. A failure at that level would likely lead to a retest of the recent lows around $77 which would form a head and shoulders pattern. While this may or may not happen in the next few weeks, this is one scenario I am preparing for.

Forgotten amidst all the fears of nuclear fallout in Japan, the markets (and our economy) continue to face the burden of higher energy costs in the form of +$100 barrels of oil.

Using a chart of USO as a proxy for oil prices, we can see that although we dropped back into the ascending channel we've been ranging in since last summer, we actually closed just above it on Friday. Keep an eye on the developing situation in Libya this weekend, as furthur war will likely lead to exploding prices in oil and a resultant drop in our markets. On the other hand, if we can finally see some end to the civil unrest that has gripped the middle east, the ease in oil prices will likely allow the markets to lift and begin to test the our new found overhead supply.


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Posted in Charting & Analysis, Commentary, General Trading