A Broken Record

The markets exhibited more erratic consolidation this week in what is becoming a bit of a broken record. We have now probed the lower edges of our multi-month range for three consecutive weeks and market participants have yet to come to any sort of consensus as to whether this level should hold or not. In fact, the level of confusion regarding this price area seems to be increasing as volatility continues to expand instead of narrowing. While this behavior is not suggestive of a healthy environment, it is also atypical of the standard technical continuation patterns, and is a subtle hint that we are perhaps ready to conclude our recent two month price correction. However, the possibility of a continued flush downwards is very real, and as I have mentioned for several weeks now, traders are better served keeping action to a minimum until the markets start behaving in a healthier manner.

Looking at a daily chart of the S&P 500 etf (SPY), we can see the glut of wide range candles over the last few weeks as we continue to zig zag back and forth in confusion at the lower ranges of 2011 price range.

Notice the growing volume as we digest these price levels. This is also atypical of normal consolidation, and illustrates the growing turnover of shares at these levels as market participants continue to come to terms with these price levels. As I mentioned last week, a test of the 200 day moving average was likely, and we did in fact tag it on Thursday and quickly rallied from that point, but Friday's persistent selling negated most of that move. These lows should hold us over the near term, but traders should be wary until the market is able to display more strength before attempting to buy this dip.

The expanding volatility that we have experienced over the last few weeks is easily seen when we take a look at a 15 minute chart of SPY.

While we were able to overcome the $128 level I mentioned last week, the the bulls were stiffly rejected just under the critical $130 level and we now find ourselves back at the bottom of the broadening wedge we have formed throughout the month. In order for the bulls to gain any sort of control over the current market, they need to push and hold SPY over the $130 area. Traders looking for a market bounce next week should continue to monitor the intraday charts and wait for a sign that the bulls have regained control. Another push above $128 followed by some narrow range consolidation just below $130 would be ideal for those looking to enter any long trades. However, traders need to keep an eye on the intraday behavior as all pops have been sold up to this point. If we continue to flounder at these levels and continue to retest the low $126 area, than it is only a matter of time before we roll over and begin another leg down in this recent correction. As always, keep a level head and let the market show you where it plans to go before entering any trades.

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Posted in Charting & Analysis, Commentary, General Trading