The Week in Crayons

I mentioned last week that the bulls would likely be tested this week as the bears attempt to regain control of this market, and while the bulls can use the light trading / short week excuse to defend themselves, the bottom line is that they failed that test this week as we not only closed red on each session, but saw downward momentum actually increase as we followed through on last week’s breakdown. While we are oversold and due for a bounce, we have now negated much of the feel good rally we had in October and find ourselves back in the middle of the trading morass we resided in for several months this year. While a bounce from our current levels would still be very positive step in leaving behind are summer lows, the recent weakness gives us a strong reminder that we continue to chop around in a broad range consolidation and it appears we will be flying the same holding pattern for a bit longer as we continue to deal with the same regurgitated mess in Europe we have been dealing with all year.

Looking at a chart of the e-mini futures contract for the S&P 500, we can see clearly that we are right smack in the middle of the 1100-1200 mess we were stuck in for several months after breaking down from our yearly highs. While we are still well off the lows we formed around 1080, we are forming new lows on Stochastics creating a bearish divergence hinting that we may have more weakness in store even if we can hold these levels and create an important higher pivot low.

Traders looking for a an oversold bounce should keep this in mind and continue to use the hit and run tactics that have been the only option available to swing traders for most of this year as we are likely to stall out on any bounces into the heavy supply just above our current price action. The 1180 -1200 area will likely be the first area of distribution if we bounce next week and traders should watch the action in this area closely as failure to get above our October breakout will potentially form a bear flag, not a new leg up. If we can reclaim 1200 and emerge from our current range, look for more supply to emerge just above 1215 or so as we begin to encounter several key moving averages. However, if we continue to have trouble finding a bid, we will likely test 1100 in short order which would serve as a critical level of support for the bulls to defend. Traders waiting for the Santa Clause rally should be very careful here and wait for momentum to clearly turn upward before getting sucked into any of the fakeouts that have become all to common this year.

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