Not today…

Wow! What a week! After several weeks of spinning our wheels as we chopped erratically at the lower edges of our yearly range, the markets finally got in gear, peeled out and ripped off a massive five day run that negated a month's worth of distribution. All the bears that piled in on last week's tepid action were left in a cloud of smoke as the markets roared away from them like something out of a Fast and the Furious movie. The only thing missing was the bulls toughly spitting out cheesy lines like:

“Chances are, sooner or later this markets gonna pull back….BUT NOT TODAY.”

So where do we go now? We have gone from oversold to overbought in one week and are now back to the the levels that held us back at the beginning of the year on all of our main indexes. While the last five days have the look and feel of a real bull run, don't forget that just last week everything looked awful as we flirted with a breakdown below levels that held us when Japan was at the brink of a nuclear disaster. Keep an eye on the big picture and realize that we are basically in the middle of a broad range of consolidation and are likely to trade sideways as we digest our newly found gains.

Looking at a six month daily chart of the S&P 500 etf(SPY), we can see that this week's action brings us back to key levels that have impacted the market throughout 2011.

This price level around $134 will be a key battleground going into the summer, and will likely be another area in which we chop back and forth as the bulls and bears continue to wrestle for control of this market. If we can breach and hold above these levels, than we are likely to retest the yearly highs and likely make new highs as we continue to define the upper reaches of our broad range. The more likely case is either sideways action or even a pull back from these levels, in which case the $130 area that held us back last month will now become a key level of support moving forward.

If we erase a lot of the daily noise and look at a weekly chart of this year's action on SPY, the range bound nature of the market becomes a little clearer to see. Notice how almost all of the action is bound between the mid $134's and mid $126's.

While the possibility that this week's action was the result of end of the month window dressing/ pre-holiday run up, also notice the impressive size of this week's candle. We started off at the lows of the range and finished practically at the top of the range. This is a huge change in character after the month of incessant selling, and tells us that we are likely to fiddle with the upper parts of this range in the near future. Because of this apparent change in character, I would be more likely to buy a dip at these levels instead of entering shorts.

However, the market has shown an amazing ability to trap and reverse suddenly on both bulls and bears alike, and traders should stay on their toes as we move into the lazy days of summer. Traders that have yet to lock in profits and those anticipating a pull back from these levels should watch the intraday charts before attempting to call a top on this bounce. Looking at a 15 minute chart of this week's action on SPY, it is obvious that we have yet to reach any point at which shorting into this rally would make any sense at all.

Keep an eye on Friday's highs, as they coincide with important levels on the longer time frames and should serve as resistance early next week. Another level to keep an eye on should we pull back is the price area around $132. This coincides with both the 50 and 100 day moving averages on the daily chart as well as the top of Thursday's base which served as the launching point for Friday's rally. Lastly, we have now had several weeks of volatile action and while its easy to get caught up in these wild swings, traders should keep a level head and realize that volatility is cyclical just like price action, and likely to calm down in the near future, especially as we enter the typically quiet months of summer.

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Posted in Charting & Analysis, Commentary, General Trading