The Week in Crayons

Despite some rather volatile moves from day to day, this week’s action in the broad markets was still basically sideways as we continue to digest the massive gains we made through out the month of October. While volatility is still somewhat high for “prototypical” consolidation, most of this week’s action was contained within the ranges of our most recent price action on all of the major indexes and is for the most part technically healthy. As I mentioned last week, we were likely to chop around this week as we contended with overhead supply while being buoyed by several layers of support just underneath us. That scenario is likely to continue into the near future as we are still basically in the same situation and probably need another week or two of healthy consolidation in order to try and make our way back to the upper part of our yearly range.

Looking at a chart of the e-mini futures contract for the S&P 500, we can see that while we have mostly gone sideways over the last two weeks, we are still technically in the uptrend that we began in mid-October as we broke from our summer range around the 1200 level. While we are still making higher lows at this point, notice the waning momentum now that we are firmly wedged between most of our important moving averages as we well as facing very strong technical resistance at our recent highs around 1280 which coincide with the neckline of the head and shoulders pattern we formed over the first half of the year. Note the emergence of some yellow and red candles on our Momo Trend Bars indicating a likely end to this particular thrust upwards. Also, stochastics is now firmly moving lower giving us another clue that momentum is slowing down.

Of course, momentum is supposed to slow down after the ridiculous pace we had as we shot up from our year’s lows, so in and of itself it doesn’t necessarily mean we are headed lower, but it does give us a clue that we are likely in need of more consolidation. If we were to have a more substantial pull back, look to the area around our previous breakout around 1200 as a likely level of support. A hold around this level would give the bulls a strongly definable higher pivot low confirming that the recent downtrend is broken. Of course, the market does what it wants to do, not what we want it to do, and if it decides it wants to squeeze higher, traders should not chase as any move above our recent highs is probably suspect and likely to fail and return to our current range [unless there is some substantial news event behind it.]

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Posted in Blog, The Week In Crayons