The Week in Crayons

After selling off for almost a month, the markets finally rebounded this week bouncing firmly higher off of the backs of some strong earnings reports by companies such as Amazon and Apple Computers. While the threat of a steeper correction was looking likely last week, this week’s bullish action has probably pushed us past that scenario and into one where we likely retest our yearly highs in the near term. The recent selling bout was the first correction of any substance we have had since rallying out of our last area of consolidation at the beginning of this year. The question we will face now as we move forward in the coming weeks is if the distribution we just witnessed was a small pause for the market to catch its breath before resuming its upward momentum or if it was the beginning of a larger phase of consolidation as we head into the summer months. While we are now entering what is typically a seasonally poor time for market performance (best described by the old cliché “sell in may and go away”), the fact remains that the rally we have witnessed so far in 2012 has shown remarkable strength and resilience that should not be easily dismissed. Considering that we are firmly in the middle of a range as we try to ascertain the various possibilities that can occur in the near future, the best course of action right now is to watch the obvious levels of support and resistance that have recently formed and wait to see how price action behaves as we enter these critical zones.

Looking at a chart of the S&P 500 e-mini futures, we can see that some pretty clear levels of support and resistance have developed over the last month as we have begun to churn sideways after our impressive start to the year. After supporting us twice over the course of the recent distribution we just saw, the area just under 1360 now becomes a key area of support as we move forward into the summer. Our recent highs around 1420 will likely serve as the next area of contention between the bulls and the bears and has a strong possibility of becoming a near term ceiling for price action if the bulls can’t push through it quickly.

Watch these two key areas over the next couple of weeks as they appear to define what is now looking like a multi-month range of consolidation similar to the ones we experienced during the second half of last year. These consolidation phases are typically difficult environments to trade and traders should exercise caution until a clear direction makes itself clear.

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