The Week in Crayons

As befits the state of our current markets, we took the elevator down this week to revisit the lower portion of our yearly trading range and pulled the rug from under the bulls that had pressed their longs as we approached the top of our range. We remain in a poor trading environment at this time as we continue to see volatility expand while price stays in an overall static state. As I have mentioned over the last several months, traders should remain patient and trade lightly and take quick profits in this environment while waiting for better conditions to emerge.

Looking at the action for 2011 on the SPDR’s S&P 500 etf (SPY), it becomes clear that although price has fluctuated quite a bit, we have essentially gone nowhere. In fact, most of the key moving averages are now zig zagging sideways as we chop around in search of our next direction. The last moving average that still has some upward slope to it is the key 200 day moving average, and it is starting to flatten out as we begin to really test it.

Friday’s action brought about the second retest of this moving average and gave us our first breach of it although we eventually held and closed higher. Keep in mind, that the more often a market tests a level, the more likely that it will eventually break. Friday’s close also left us below a critical level that had stymied us throughout late June. Watch the price action just below $130 early next week, as it will likely offer up as strong resistance if good news doesn’t emerge over the weekend to prop us back up. If we open and hold below this area, the bears are likely to press their shorts and try to get a retest of our June lows as well as a close below the 200 day moving average. A break below these levels would complete the head and shoulder pattern I mentioned a couple of weeks ago and could be the impetus for a further move down. However, keep in mind that traders that have tried to jump in early on the next major move have repeatedly been burned, and the prudent approach continues to be to wait for the market to align itself properly and prove to us that it is ready to break out of this range one way or the other. If the fools in Congress were able to give us some good news over the weekend and we are able to open above $130, watch for a gap test around $133 and eventual resistance at the mid $134’s as we encounter our most recent pivot highs as well as a descending trendline.  Because of the uncertainty surrounding the markets at this time, traders should continue to maintain a defensive posture and wait patiently for a better environment to emerge.

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Posted in Charting & Analysis, Charts, Commentary, General Trading