The markets spent the better part of this week showing us that what comes up must come down as we retraced about half of the fast and furious rally we had a couple of weeks ago. As has been typical in the current environment, bulls that chased price action at the highs of our range were punished after two consecutive gap downs brought us back to the middle of our range at the beginning of this week. As befits being in the middle of a broad range of consolidation, the market continues to send us mixed signals as it tries to find some equilibrium in its price action.
The bevy of mixed signals we are getting right now are plain to see if we look at a daily chart of the SPDR's S&P 500 etf (SPY). While we are still in a technically healthy consolidation amidst a strong uptrend, some signs of topping action are now beginning to show up. In fact, the year's price action so far is starting to resemble a head and shoulders pattern that is currently working on its right shoulder.
The top of this shoulder is also an “abandoned baby top” candle formation which is also a bearish reversal pattern in and of itself. Don't forget that these reversal patterns are also forming against a backdrop of increased volatility, a classic harbinger of reversal action. However, while the signs of a reversal are looming over the market, the fact remains that we are still holding up very well, especially when you consider the dearth of bad news regarding sovereign debt issues across the world. The run we had in early July was very strong, and we found support on a swiftly rising 20 day moving average at the end of the week. We are also under a rising 200 day moving average which recently held us a strong level of support. While some ominous signs of reversal are creeping in, traders should step back and realize that the overall trend is still up, and dip buyers are still supporting this market. We are still in the chop zone, and traders should remain nimble and light while keeping an eye on the bigger picture until the market reveals which direction it will take once we are truly done with this corrective range.
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