The Week in Crayons

I mentioned last week that our near term highs were likely to contain price this week as the markets further consolidated the massive gains we have seen over the last several months. Well, I was way off. That near term range was successful in containing price action for an entire day this week before giving way as most of the major indexes surged to new highs for the year. Of course, that is why traders should always consider several scenarios when analyzing their trading plans for the coming days/weeks and be sure to analyze the likely levels to be reached should your trading thesis work or fail. The strong bullish action we saw this week (all year actually) also strongly illustrates why it is a bad idea to attempt to call a top on a run away bull market. Unless a trader was absolutely perfect on their timing and caught one of the small handful of down days of any substance over the last several months they were likely burned as the markets ran away from them. While trading in a bull market is generally considered easy, it is only easy for those that have the wisdom and patience to wait for opportunities that take advantage of the underlying current in the market. However, this type of market can be brutally difficult for a trader that is minimally involved in the swift rise and finds themselves attempting to either chase after profits or go against the grain by shorting a stock in a misguided attempt to “take back” the profits they missed. This type of trading behavior is a recipe for disaster and any trader in this type of rut should step back and examine the present environment and whether or not their trading plan reflects the price action in the current market.

That price action is readily apparent when we examine a chart of the e-mini futures contract for the S&P 500 index. The strong bullishness of our current rally is evident as price quickly surged upwards this week to reenter the channel that has defined our current rally over the last several months. However, while price has indeed resumed its place inside this channel, the argument I posited last week that the market’s technical character had changed is still valid. Now that price has violated this tight channel, it increases the chances of this behavior reoccurring. Also, recently, volatility has begun to rise as we have now experienced two of the widest candles of the year in short succession. While this behavior in and of itself means very little at this time, traders should continue to monitor volatility in the coming weeks as it will likely provide some valuable clues into the near term health of our markets. If volatility continues to increase (either on wild surges upward of downwards), then it likely hints at a need for a more substantial price correction as trading sentiment becomes increasingly incongruous.

However, as of now price remains relatively stable and traders should assume that the trend is still intact and plan accordingly. Our short lived price ceiling around 1380 now becomes our first level of support with the area around 1340 becoming the next and likely more important level of support in the event that price falls back from these levels. If our upward momentum continues to accelerate and price breaks out of the top of our channel it will likely be unsustainable and traders should exercise caution and protect profits.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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Posted in Charting & Analysis, Charts, Commentary, Futures, General Trading, Stocks