The Week in Crayons

The markets exhibited more erratic behavior this week as we continue to probe what appears to be the lower edges of our current broad range of consolidation. While most of the week was again marred with heavy distribution, we did have a couple of days where the dip buyers came in and started to alleviate some of the massive downward pressure we have encountered over the last few weeks. While we have had a pretty significant drop from the highs of the year and things have looked pretty disastrous at times, it is important to note that we are basically at the price levels that we started the year at on most of the major indexes.

Looking at a chart of the S&P 500 etf (SPY), we can see that the year's opening price of $126.66 eventually held as support during the tsunami induced disaster in Japan earlier this year and appears to have held up as support this week.

As I wrote last week, once we approach critical levels of support or resistance, they begin to act as a magnet for price action as more and more market participants begin to question whether or not those critical levels will hold on a subsequent retest. While a furthur probe into the March 16th lows or a dip below our 200 sma are not out of the question, this area should hold as support barring any sort of disastrous news coming out of Europe over the weekend. The uptick in volume as we tested support this week is another clue that we may have found our level of support for the near term. However, as I have stated several times over the last few weeks, wait until the markets prove to us that they are ready to bounce before trying to catch a bounce as the short term trend is still significantly down.

Traders looking to get long the market indexes have had zero reason to do so if they have paid any attention to the intraday charts over the last few weeks. Every test we have had of a prior pivot high has been met with heavy selling pressure and has ultimately failed.

Notice the swift drops we have had each time the market has probed the $130 area. Not only have we dropped quickly on each occasion, we made lower highs on each attempt to reach it. A closer level of resistance that should provide the first seeds of a rally is a break above the $128 level. If we are able to do so early Monday, we will have formed an inverted head and shoulders, and a measured move would put us just under $130 and right at the descending trendline connecting our previous attempts at this area. As I mentioned last week, this will be the real battle the bulls will need to win in order to regain some semblance of control over the suddenly resurgent bears.

The U.S. Dollar put extra pressure on the markets as it surged upwards throughout the week. Keep an eye on it as it approaches considerable levels of resistance in the mid $76 area.

While the inverse relationship between the dollar and equities has been somewhat spotty over the last few weeks, this is a relationship that has been the basis of our rally for two years now and is not likely to decouple this quickly based off of some fears in the Eurozone. If the dollar were to fail at these levels and reverse course, it would alleviate some of the pressure on equities as they attempt to gain traction at the current levels. However, if the dollar were to continue to rally and break above these critical levels of resistance, we would likely see a continued drop in equities at some point in the near future. Keep an eye on the dollar as it navigates this key area as it is likely to provide valuable information traders can use to guage the ultimate direction our markets will take going into the summer.

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Posted in Charting & Analysis, Commentary, General Trading