The Week in Crayons

As I wrote a couple of weeks ago, this market continues to trap both bears and bulls as it tests the boundaries of its current range of consolidation. This week was no different as the aggressive bears expecting us to breakdown after a dead cat bounce from last week's lows were burned as the markets used them as fuel to surge past recent resistance. One of the key components of the strong move up was the continued strength in small cap names.

In fact, as we can see on a chart of the iShares Russell 2000 etf (IWM), not only did we reclaim all key moving averages, but we actually retested the upper range of the wedge that we had initially formed after our first real breakdown from the highs we had formed earlier this year. While it closed weakly on Friday, IWM showed considerable strength this week and is now firmly back in the upper region of our recent range. Keep an eye on IWM, especially as it tests our upper range as it is a good gauge of risk appettite and should provide us with a valuable tell depending on how it reacts at this level.

While the large caps couldn't keep up with the strong move up the small caps made, they had an impressive bounce of their own this week as well. Looking at the SPDRs S&P etf (SPY), we can see that the large caps were also able to reclaim all of their important moving averages and were able to reclaim some key levels of support. The next step for the bulls would be to reclaim the descending trendline that held us in check after we lost the highs earlier this year. If we retrace from here, $130 would be the first level of support although a further drop down to the mid $127's would not be out of the question. If the bulls exuberance can sustain our recent rally, than $133.50 will be a critical test for SPY.

The weak sister of the main indexes lately has been the tech heavy PowerShares QQQtrust (now QQQ). While QQQ was also able to bounce sharply this week, it was unable to reclaim its 50 day moving average and also met stiff resistance in the form of a descending trendline similar to the one that SPY now faces. While QQQ is now also above some key levels of support, it is still showing signs of relative weakness and may need more time to retest some of those levels of support before it is ready to test the upper reaches of our current range.

Looking at a 5 minute chart of Friday's action on QQQ gives us a good picture of the weakness in tech as it attempted to rally past the critical $57 area and failed. Notice the rainbow pattern created by the strong action in the morning followed by what first appeared to be healthy consolidation just under a key level but eventually turned into a roll over of price action that ended the day close to the day's opening price. While this chart is indicative of just one day's price action and may be negated as soon as Monday, it is a valuable clue telling us that perhaps we aren't ready to move past our current prices. In fact, just as the bears were visciously trapped this week by a sudden rally, overly exuberant bulls may be facing the same thing if they chase stocks here into resistance. As always, if you are playing the recent chop, continue to keep your positions light and keep rotating your plays by entering new trades as you lock up profits in others.

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Posted in Charting & Analysis, Commentary, General Trading