The markets didn’t do much of anything this week as they continue to chop around just above the key price levels that had held us in check for most of the year. Not much has changed from a technical perspective, and my analysis from last week still holds. While many on the twitter stream are becoming increasingly bearish as we get further along in May, the markets are still behaving in a healthy manner and show no technical signs of rolling over just yet.
Looking at a chart of the S&P 500, we can see that the “toppy” action we have seen the last couple of weeks is actually perfectly normal consolidation just above a key level of price.
The area just under $134 was a strong level of resistance earlier this year, and it is only natural that price action should gravitate back to that level as we continue to come to terms with the break of that level. We are now in the midst of forming a wedge/descending triangle just above our breakout levels, and a break above it next week will likely propel us to new highs for the year. If we fall below that price level, we are likely due for a retest of our rising 50 day moving average.
The Nasdaq composite has consolidated in a mostly sideways manner for the last two weeks and is currently forming a bull flag just above the important support at about $58.
It has strongly held two breakaway gaps it formed in April, and still looks like a strong target for capital to rotate into as it flees the sagging commodities complex. Keep an eye on your favorite tech stocks, as a break out of this pattern in QQQ will likely lead the markets higher. If we fail this pattern, two very important gaps remain as strong support just underneath these levels.
One of the reasons the markets have floundered recently is the renewed strength of the U.S. Dollar as it rebounds from key levels it had broken in April. It encountered some resistance on Friday as it reached its 50 day moving average just above the $75 level and is likely to stall out at these levels.
However, there is still room to the upside up to about $77 before it reaches strong resistance at the bottom of the multi-year wedge it has broke down from earlier this year. While commodities have felt the burden of a stronger dollar more acutely than the broader markets, its recent rise has dragged on the markets and astute traders should keep an eye on it as it continues to be reliable predictor market movement.
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