Led by the debacle in silver, the commodity complex took a massive plunge this week pulling the broad markets down with it. As I mentioned last Friday, the markets were somewhat extended going into this week and likely due for a pullback and a retest of the price levels that held us in check in late February. I've seen plenty of chatter on the twitter stream saying we formed the “Bin Laden Top” on Monday's highs, but while this week's action was not the prettiest, we still stand on firm technical ground and the trend is still pointing up. Mirroring the week's action, today's trading was somewhat lackluster as we gapped higher and trended down throughout the day before a small respite at the end of the day. However, it is important to note that all of the major indexes were able to successfully hold above their close from Thursday and are in the process of forming a pivot low at a key level of support.
Looking at a chart of the SPDR's S&P 500 etf (SPY), we can see that we are now in the process of retesting the neckline from the inverted head and shoulders we formed throughout the last three months.
Always keep in mind when you are using technical analysis, that we aren't just looking at cool designs on charts, we are trying to read the psychology of the market place. In this particular case, we are looking at a price level that derailed our rally into march, and subsequently rejected a further attempt to clear it two months later. It is only natural that price action would eventually come back to this level as the market continues to acclimate itself to these new prices. Watch the lows that we formed this week. A drop below those levels doesn't necessarily mean that we are topping out here, but it would likely mean that we are still in a corrective range and need furthur time to resume our rally. If we can hold above them, than a we will likely push to new highs despite(or perhaps because of) the sudden bearishness in the markets as the “sell in may” mantra makes its rounds through the twitter stream.
While the possibility of continued distribution at these levels cannot be ignored, looking at a chart of the Nasdaq (QQQ) we can see that several key technical levels would need to be breached before we need to truly worry about an end to this rally.
In fact, this week's pullback did not even fill our most recent gap just under $58. A more significant gap exists just below $57. With the notable sluggishness in small caps, and the disastrous action in commodities this week, keep an eye on tech names as they are likely to become the sector the “risk” money flows to if we are to continue the next leg up in our bull run.
Silver was with out a doubt the big story of the week, and one glance at the carnage on the chart of SLV shows us that this was a horrible week for the unfortunate souls that were long into this week's repeated raises on silver margins.
After stair stepping up for the most part of two month's, SLV took the elevator down for about a 25% loss in its value in five days.This chart now sports some pretty ugly technical damage, and is likely to chop around for the better part of this summer as it begins to come to terms with the price shock it just experienced. While there will be plenty of sharp moves for short term traders to take advantage of, those looking for longer term trends are likely better off waiting for the price to stabilize over the next few weeks to months before jumping in.
As I mentioned last week, the U.S. Dollar was at key historic levels, and likely due for a bounce which would likely cause commmodities to pull back. That was an understatement apparently as oil and gold followed the massive plunge of silver this week as the dollar rallied. If we look at a long term chart (monthly) of the U.S. Dollar index, we can see that although the long term picture is still pretty bleak for the greenback, it has plenty of room in the short term before it meets resistance.
The first level to watch would be $76, which marks the bottom of the wedge from which it broke down from earlier this year. A more significant level resides in the middle of that wedge at just above $80. This is a multi year bottom that was breached in late 2007, and the last two attempts to remain above it have ultimately failed. Because our rally over the last two years has been largely created by the systemic destruction of the U.S. Dollar, it is important to keep an eye on it now as any resulting rally in it is likely so stymie our markets.
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