The Week in Crayons

Propelled by several earnings beats, the markets were able to recover from last week's drop and closed the short week right back at the top of our current range. While things are looking pretty bullish right now and its easy to get excited about the strong rip we had from the lows we printed on Monday, traders should exert some patience as we probe levels that have stood as strong resistance throughout the year. We are unlikely to just blow past these critical levels, and traders should keep an eye on the manner in which the markets assimilate this week's quick gains next week as it will be a good sign as to whether we are ready to break out of our current range or if we are merely testing it yet again. As of now, things look pretty bullish, and some benign sideways action at these levels would offer the bulls some excellent trading setups.

As I mentioned last week, a move back up to these levels would form an inverted head and shoulders pattern on the S&P 500 and looking at a chart of SPY, we can see that we closed today just below the neckline of that pattern.

A break above that line would have very bullish implications and would likely lead to a run up to $140. This level just under $134 has held the markets in check for most of this year, and is likely the critical level for us to overcome in order to resume our rally. While another failure at this level doesn't necessarily mean that we will top out, it will likely mean that we are going to need more time to consolidate and may have to retest $130 and perhaps even below that level at some point.

I mentioned the relative weakness in the Technology sector last week as one of the factors that have held up this market over the last few months, but after furiously rallying this week off of the earnings reports of several of its key names, QQQ has now breached its previous pivot highs.

In fact, QQQ was able to practically erase several weeks worth of consolidation in one big gap up and has made up much of the ground that stood between it and its stronger peers. The level under this gap up around $57.50 should now offer firm support, and if QQQ does not retrace and fill this gap ( at $56.60) it would offer us yet another clue that we are ready to break out to new highs. This year's highs at around $59 provide the next obvious level that needs to be breached in order to break higher, but astute traders are better served seeing how QQQ behaves around the $58 level.

While the small caps have rallied strongly this week as well, they have come up well short of the levels they made earlier this month. One of the tough things in analyzing the markets is to try to guage just what implications certain divergences have and to not get fooled by obvious assumptions. 

For instance, we can look at a chart of IWM and assume that because the small caps performed noticeably weaker than some of its counterparts that perhaps money is flowing out of riskier equities. However, the more likely scenario is that money was actually flowing towards the less extended names in the tech sector as the markets continue to “sync” up as we consolidate. Continue to watch IWM as it chops around under its recent highs, as it is likely to lead us higher once the weaker components in our market are ready to follow it upwards.

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Posted in Charting & Analysis, Commentary, Stocks