The Week In Crayons

After breaking out sharply last week from the cup and handle pattern I mentioned a couple of weeks ago, the markets spent this week consolidating those gains while holding some key levels of support in the process. We have now worked off some of the overbought conditions we had built up while rallying sharply from last month’s lows as we head into the typically bullish holiday season. However, not everything is peachy as the markets also regressed back to their recent paradoxical pattern of volatile consolidation with this week’s action.

I thought I would change up things a little this week and share the type of chart I typically look at when watching the intraday action in the futures and forex markets. Instead of the typical candles you would normally expect to see on a chart, this chart uses the Momo Trend Bars our resident wizard @jstantrades designed for the Ninja Trader platform. These candles do a nice job of showing the momentum of the price action allowing the trader to not get too caught up in the actions of each individual candlestick and instead observe the overall swings of the instrument. In this case, we are looking at the e-mini futures contract for the S&P 500. Looking at this chart we can see that momentum has obviously been bullish for the better part of a month now, but has started to wane as we pulled back this week after hitting some stiff levels of supply.

While we were able to hold the now swiftly rising 20 day moving average, we are now back under the key 200 day moving average as we form a broadening rising wedge. This is typically a bearish pattern and hints that we likely have some more consolidation coming as we come to terms with our new price levels. However, this doesn’t necessarily mean that we are reversing lower, only that the recent move up is having trouble sustaining itself. In fact, we actually have now formed higher highs and higher lows as we work our way out of the ditch we dug a few months ago.  Now that price is wedged between many key averages, there is a good probability that it will chop back and forth as it comes to terms with this area. This would actually be a healthy sign as volatility would again quiet down in order for true demand to build up for the next move up into overhead supply. The breakout area from our last range (1200-1210) should serve as the first line of defense as it did earlier this week for the bulls, while last week’s highs around 1290 should serve as the near term resistance. If we lose 1200, 1600 becomes a likely stalling point while 1100-1080 become the critical lines in the sand for the bulls to defend. While this market continues to tax many swing traders, it has recently shown signs of improving, and continued chopping in this area should help many charts begin to set up for nice runs into the year’s close.

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