The Week in Crayons

It is often said that the market takes the stairs up and the elevator down. While it is somewhat of a cliché, it is an apt description of typical market behavior as our fear impulses usually overpower our greed in a normal environment. However, in the current environment we have more of a crazy seesaw thing going on as each swift fall is quickly followed by a quick rise as bears and bulls keep jumping on one end or the other as we oscillate between the edges of our range. What is happening is that each side’s fear is fueling the other side’s greed causing each oscillation to become somewhat exagerrated as they continue to squeeze each other. This type of action is of course indicative of wildly differing opinions on the value of a given equity and illustrates that we are still not sure of where our markets are supposed to be right now. While we started last week staring into the abyss as contemplated a sub 10,000 dow, we closed this week considerably higher and are now looking at the stars as the Nasdaq composite approaches its yearly highs. While the very strong bounce we’ve had over the last two weeks tells us that we have likely found a near term bottom, the nature of this market’s behavior suggests that we are likely still in a broad corrective range as opposed to getting ready to resume the uptrend we formed in early 2009.

Looking at a chart of SPY, we can see just how precarious things were as we started last week breaking down from a channel and forming new 52 week lows. While we zoomed straight back to the top of the channel in very short order, we are now very extended as we come up to some stiff resistance. Volume has been decreasing as we probed higher this week showing that less buyers are willing to step up as we come into our near term price ceiling. On the positive side, SPY was able to convincingly breach its 50 day moving average convincingly, and is now well above its short term averages as it begins to test the upper levels of our recent range.

These should provide support for price action in the event of a pull back. If they do not hold, the $112 level will become the critical line in the sand that the bulls need to defend in order to show progress in reclaiming control from the bears. If we continue to squeeze higher, another important point of control for this market will be the area around $128. This coincides with the very important 200 day moving average as well as the neckline from the head and shoulders pattern we formed during the first half of this year.

Looking at the bigger picture, this market continues to trap both sides as it reverts violently from its extreme edges and traders should keep this in mind instead of getting caught up in the euphoria or despair that seems to appear out of thin air after every move.

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