This Friday’s action marked the end of not just the week, but also of the first quarter of 2012. While the markets began the day in a weak fashion selling down at the open, buyers stepped in and were able to regain control and push price action back near the session’s highs by the close. The pattern today was a microcosm of the entire quarter’s market behavior as any and all dips in price have been met with buying throughout the start of 2012. Any trader that recognized this pattern early has likely had one of the best quarters of their trading career as this rally’s price action has been extremely straight forward, especially when compared to the violent whipsaws we experienced last fall. While this run is getting a little long in the tooth and chances are that we will soon abandon the narrow channel that has contained our trading for the last several months, we remain in a bull market and traders should respect this trend until it is proven otherwise.
The simplicity of the first quarter of trading in 2012 is reflected in the following chart of the S&P 500 e-mini futures contract. Notice how only two lines are needed to capture the essence of this year’s price action. While it is understandably difficult at times to expect a trend that seemingly goes on forever to continue, a trader should always respect this price behavior and trade with it until it stops working. After all, that is why we trade with stops.
As I mentioned earlier, this near term rally is getting kind of old now, and while we may soon exit this particular channel , we fully remain in a bull market and traders should begin to monitor levels of support on any particular equities that they feel they have missed out on or sold too early this quarter. We have been overbought for this entire rally and price is now beginning to test both the bottom of the channel and the rising 20 day moving average with more frequency. While this is in no way a recommendation to go short or try to call a top, it is a reminder to be cautious with profits and fully anticipate all scenarios not just the ones we are hoping for.
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