The Week in Crayons

Much to the chagrin of bears everywhere, the markets continued their relentless march up for yet another week as the rally to open 2012 continues. While there continues to be sporadic bouts of selling intraday, there has been a strong and pervasive bid that has supported price action and has consistently thwarted all attempts at selling this market down. From a technical perspective, nothing has changed in about six weeks now as we remain perpetually oversold and extended as we slowly squeeze higher.

This is clearly evident in a chart of the e-mini futures contract for the S&P 500 which shows all of this year’s price action contained within a narrow rising channel. Almost the entirety of this move has occurred with an overbought stochastics reading as well. Also note the preponderance of longish lower wicks on many of the candles during this rally indicating that while there have been some attempts to push price down, it has inevitably been met with a strong afternoon bid.

While this traditionally is a sign of strength, it can also be a hint of future weakness when this behavior occurs after a prolonged rally. However, while it may become tempting for traders to gamble and try to pick a top when the market behaves like this, the more prudent course of action is to assume that the market will continue to behave in the same manner until it breaks out of this channel. Ironically, a breakout above the channel would result in a possibly unsustainable acceleration of the current trend leading to a higher probability short than a corresponding breakdown from the channel which would likely lead to a more benign sideways consolidation. However, while it is prudent to anticipate what the market will do, it is all conjecture until the theories either succeed or fail and astute traders must also recognize the present and profit from it…and the present remains a buy the dip environment until proven wrong.

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