The Week in Crayons

After taking last week off, the bulls came back ready to work this week lifting us well off our recent lows in all of the broad market indices. Once again as has become par for the course, price action changed course immediately and quite violently as we surged upward negating much of our recent fall with one huge day of buying. Our current environment continues to be a field of landmines trapping both bulls and bears alike each time setiment suddenly shifts depending on what news item or rumor happens to come up. However, while price action has been extremely volatile, it has been contained within a reasonably well defined range for the most part. While there are still plenty of mixed signals and the possibility of strong moves in either direction, the likely scenario is one in which we continue to probe the extremities of our trading range as the markets continue to find their proper value.

Looking at a chart of the e-mini futures contract for the S&P 500, we can see that for the most part we have actually been in a pretty well sustained uptrend after bottoming out early August. While we actually formed new lows in early October, this proved to be a false breakdown and price quickly reverted back its rising channel. This move up culminated with a false breakout above this channel as buyers got ahead of themselves and eventually cascaded down over the last couple of weeks as supply finally overwhelmed demand. The downward momentum was finally reversed this week as we formed a critical higher low pivot price around the 1150 area. While this channel isn’t perfect and has had trouble holding price action on several occassions, it does give us a rough picture of the strengthening price action over the last half year or so.

As we approach the close of 2011, too reference points that are likely to become key levels of support and resistance are the recent pivot low and high we just formed at around 1150 and 1290. The more immediate area of concern would be the recent pivot low we just formed. A break below that would place us firmly out of our rising channel as well as invalidating the higher low we formed and would almost certainly lead to a retest of the year’s lows. A break above our recent pivot high around 1290 however could lead to several scenarios depending on the action prior to a breakout. If we were to surge past it early next week, it would likely be part of an unsustainable squeeze higher destined to fail. On the other hand, if price action were to consolidate and give demand a chance to catch up with the overhead supply then the chances of a breakout holding above this area increase tremendously. As long as price remains in between these two reference points, the markets can be viewed as being in a neutral state of range bound behavior.

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