The Week in Crayons

After briefly flirting with disaster during the early part of the week, the markets rebounded sharply, and ran right back to the levels that have contained most of the price action for the last two months. The action continues to be violent and frothy telling us that participants are still very undecided as to what the proper price for equities is at the current time. While price has been somewhat contained in a channel during the last two months, it has been marred by high volatility and cannot be considered to be healthy consolidation at this point.

Looking at a chart of the average true range of the S&P Spdrs 500 trust series etf (SPY), we can see that volatility has actually increased recently after somewhat quieting down. Looking strictly at the volatility, we have now emerged from a “consolidation” phase into a new “thrust” phase in the markets.

The initial thrust was downwards as as we broke down from our channel and formed new 52 week lows, but the next thrust was decidedly up as we rebounded sharply from that move. The million dollar question of course is, which of those moves was the fakeout? While we can guess, the fact remains that we are in a highly charged market that continues to oscillate in an extreme fashion which is just as likely to race down to its recent lows as it is to charge up towards the top of our recent price action depending on what news comes out of Europe each night. However, traders should take note that the market now has a downward bias and must prove it is ready to move upwards before traders can trust it for anything more than a one to two day scalp. One of the keys I will be looking for to show that the market is getting healthier would be for volatility to die down while we hold the current price levels before attempting to break out to the upper side of this range.

The downward bias to our current environment is evident when we examine the price action of the S&P Spdrs 500 trust series etf (SPY). Note the downward slope of all of its key moving averages. Also note how we have failed sharply each we have approached the 50 day moving average.

Watch how we behave as we contend with both the 50 and the 20 day moving averages into next week as they will both likely exert downward pressure on price action as the bulls attempt to push price through the heavy overhead supply. If the bulls are able to win that battle, then a retest of the $122 area would be the next logical step. If we fall back from here, a significant battle should take place around the $112 area. This will likely be a major tell for our near term direction. If the bulls can hold this area and bounce back up to reclaim some of the short term averages they will have gone a long ways towards regaining control of this market. However, if we lose $112, it would tell us that the bears are in complete control now and we would very likely go on to break our newly formed lows as well.

As I have maintained for several weeks now, this remains a day trader’s market, and continues to be a very difficult environment to swing trade or invest in, and traders should exercise extreme caution and patience until conditions improve.

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