The Week in Crayons

A week of indecision was capped off with a day of indecision on Friday as the markets steadily sold down after a gap up prior to the open. We finished the week about where we started it, and have now consolidated in a sideways manner for the better part of two weeks after furiously rallying from the tsunami induced lows we made in mid march. While this correction in time is technically healthy and exactly what a trader should look for before a resumption in an uptrend, there are some signs that the market may need more time to “catch its breath” so to speak. Looking at this week's action on a chart of the SPDR's S&P trust series (SPY), it is quite apparent that we are still having trouble coming to terms with the price level just under $134 that had held us up earlier this year.

The fact that we had seven days of indecision followed by a day of selling that practically encompasses all of them should not be taken lightly by overly exuberant bulls. We currently remain at the upper edges of a corrective range on SPY, and a pullback to our recently breached 20 and 50 day moving averages would not be out of order. There is still a gap to fill at $131.50, and we likely have strong support a buck or two below that. However, the fact that we are at resistance is not in my opinion a reason to get overly bearish and start calling for a double top as this market remains in a healthy uptrend and traders should continue to trade it as such until it proves otherwise. A break and hold above $134 at this stage would almost assure a retest and probable break of the highs we printed earlier this year.

The small caps as seen in a chart of the iShares Russell 2000 index fund (IWM) have already broken to new highs, and are currently in the process of pulling back and retesting their previous levels of resistance.

These levels presumably should now act as support, and a bounce from here would be a signal that the broader markets are ready to follow IWM higher. The small caps have consistently outperformed their peers throughout this rally, but were noticeably weaker on Friday perhaps giving us a clue that traders are momentarily avoiding riskier stocks.

Another clue that perhaps the markets need a little more time to catch their breath is the continued weakness in the financial sector.

Looking at a chart of the SPDR's select sector financial etf (XLF) we can see that the financials made a strong move on Wednesday and appeared ready to catch up to their peers. However, XLF utterly failed to hold above its key 50 day moving average and instead reversed lower on two days of pretty steady selling. XLF remains above its 20 day moving average as well as a key level of support around $16.25, but is also outside of the steeply ascending wedge that had defined its recent price action. Look for a continued chop as XLF attempts to firm up at this level. While the financial sector is clearly not a leader in this rally at the moment, traders should keep an eye on it as it has the potential to either continue to be an anchor on the markets, or possibly be the impetus to kickstart a new leg up if they suddenly firm up.

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Posted in Breaking News, Charting & Analysis