The chop zone

We had more of the same this week as the markets continue to chop around as they come to terms with the important levels that first held us back in March of this year. The action has been quite erratic over the last couple of weeks, and traders should continue to trade lightly as they wait for the current consolidation to resolve. While the action this week definitely had a bearish undertone to it, the current trend remains up and traders will likely be better served by waiting for long setups to develop as the broad markets come to terms with these price levels. Keep in mind that while the possibility for a continued push downards is very real, it will likely lead to more choppy action as we test several levels of support and moving averages. If we were able to break out of our recent consolidation however, there is not much resistance above us and we would likely have a much cleaner move upwards.

As I mentioned last week, a break below the area just under $134 on SPY would likely lead to a retest of our 50 day moving average which is exactly what happened on Tuesday.

We bounced strongly the next day but eventually reversed at our 20 day moving average and closed the week right at the neckline on the inverted head and shoulders pattern we formed throughout the last three months. This is a crucial level to watch, as a furthur drop would likely mean another couple of months of consolidation as we continue to digest the gains we have made throughout the last couple of years. In the near term, we are now in two “chop” zones (the first being the wedge we are forming over the inverted head and shoulders and the second being the area between the 20 and 50 day moving averages) and traders should expect erratic price action as long as we remain in them. As always, don't try to guess what the market will do, just wait until these patterns resolve and the market shows us what it will do.

After a couple of strong weeks, the tech sector performed much worse than its counterparts this week. Looking at a chart of QQQ, we can see that it fell quickly below the bull flag it was forming and made a strong push into the massive gap from April 19th. We bounced sharply from there, but encountered stiff resistance at the critical price level just above $84.

We are now under critical resistance as well as chopping between the 20 and 50 day moving averages, and traders should not rule out the possibility of a complete gap fill at 56.60 in the near future. We still have plenty of support below us, and all signs point to continued price swings in both directions as we continue to sort out these price levels. A break back above about 58.40 as well as being able to hold above its 20 day moving average would be bullish, but that scenario will likely need some time to develop.

The dollar continues to drive this market, and traders should monitor its performance on a continual basis as it has had a strong inverse correlation with the markets over the last few years.

Looking at a weekly chart of the U.S. Dollar Index, we can see that we have two key trendlines just above us which would likely serve as a pretty stiff test to the recent bounce we have seen. The U.S. Dollar remains in a long term downtrend, and while it may be in the process of establishing a bottom here, it still has plenty of work to do and needs to prove itself over a longer time frame before traders can assume that we have indeed bottomed out. Watch the action into next week, as a push higher into the $76 level would hint at a continued drop in the broad markets.

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Posted in Charting & Analysis, Commentary, General Trading