The Week in Crayons

Although many bulls were ready for us to blast off last week as we chopped around close to our previous highs, this week's action further solidified the fact that we still remain in a broad corrective range. While we closed the week on a somewhat positive note and appear to be establishing a higher pivot low on many of the major indexes, we are still getting some mixed signals and likely need more time in order for several of the underlying sectors to become better aligned with each other. Looking at a chart of the S&P 500 (SPX), it is clear to see that the markets have not fully come to term with higher prices after we stalled out at the 1340 area and dropped back this week.

The 1300 area served as great support and for the time being has become an important (and higher) pivot low. If we can resume our march upwards from here and rechallenge the 1340 level that halted our steep rally last week, we will have formed an inverted head and shoulders pattern. A break out above this level would likely lead to not only new highs, but a likely challenge of 1400 at some point in the near future. However, if we stall out at this level and have trouble breaching the 1325-1330 area, we are likely to retest 1300 and possibly even retest the critical lows we formed in mid-march.

On a positive note, the small caps continue to show relative strength and keep hinting that there is still quite a healthy appetite for risk in the current environment. Looking at a chart of the Russell 2000 index (RUT-X), we can see a that we found support at the steadily rising 50 day moving average and were able to close above the key 20 day moving average.

The small caps are looking healthy here, and if they are able to hold above 830 or so and avoid falling back into the range that had held them up prior to the weakness we had in march it can be seen as a positive sign that we are ready to head higher. Keep an eye on the small caps as along with commodities they have been the true leaders of our recent rallies and are likely to lead us higher if they can resume their climb higher.

In stark contrast to the small cap stocks, tech stocks have continued to be laggards and are their performance has been noticeably weaker than most of their peers. The poor reaction to Google's (GOOG) earnings as well as continued weakness in Apple (AAPL) served as reminder that even the big “leaders” have pullbacks and retracements. While the Nasdaq Composite Index (COMPQX), was able to somewhat overcome the weakness in two of its biggest components and still finish the day above two important moving averages, it remains the weakest of the big three indexes.

Watch the performance of tech names over the next few weeks, especially as earnings reports start to roll in as they will likely be a good tell on the status of our economic recovery.

As I've stated for several weeks now, expect choppy action as the market continues to consolidate and focus on range based strategies that take advantage of our current conditions.

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Posted in Charting & Analysis, Commentary