The Week in Crayons

Although this week’s action in the markets was relatively quiet as we mostly drifted sideways, it was actually quite productive as we were able to consolidate the rapid gains we made over the last couple of weeks in a rather benign manner instead of the violent swings up and down that have become typical of our current environment. While we are still facing some stiff overhead supply in all of the major indexes, we have now established some short and intermediate term support as we continue to regain the losses we incurred this summer.

Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see that we closed the week breaking a critical price level as we were finally able to eclipse the area around $123.50. This level was the scene of a tremendous bull trap in early August as we fell sharply lower after forming what appeared to be a strong reversal hammer candle. We encountered this level a second time one month later and once again fell sharply as supply completely overwhelmed the lack of demand at these prices. This time however, price action consolidated just below this level showing that the bulls were finally beginning to assert themselves at this area and were able to push the close above it on Friday afternoon.

Notice the bullish cup and handle pattern we have formed over the last few weeks as well. Significantly, it came after what now appears to be a false breakdown earlier this month giving us a good clue that while we may not be ready to press to new highs we have likely formed a near to intermediate term bottom. The critical 200 day moving average now looms over us and will likely serve as a magnet for price action as bulls and bears eagerly await for a retest of this important indicator. If Friday’s breakout fails and we cannot in fact push past our near term ceiling, we now have several areas of support at which buyers will likely step up. The bottom of the handle we just formed around $120 has held up well over the last week and would likely be the first line of defense for the bulls while the $118 area which lines up with both the 20 and 50 day moving averages likely serving as more significant support. If more bad news out of Europe torpedoes our markets yet again, look for $112 to be the key battleground.

While we are certainly not out of the woods yet as the possibility for bad news coming out of the Eurozone could still potentially derail our markets, we are now entering what has seasonally been a good time to buy equities and appear to have formed the bottom of what I consider to be a broad corrective range. Another week or two of quiet action would go a long ways towards setting up some decent charts and swing traders should start watching for potential chart setups to ease their way back into this market.

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