The Week in Crayons

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While the week began on a positive note as we pushed higher on the broad market indexes, the widespread selling that marred the end of the week now leaves us dangerously close to the support that was painstakingly developed during the early part of April. Despite the extremely weak action we saw on Friday, we remain in a consolidation phase until our current range is negated. A critical third test of the bottom of this range will likely arrive early next week and traders should watch for price action to confirm whether or not we are likely to find support. The edges of these sideways phases of the market can be tricky as speculators try to jump in early on both sides of the trade either anticipating a break or hold of the recent range and the prudent course of action as we head into next week is to wait for a clear signal to develop.

The difficult nature of trading during these sideways phases can be seen as we look at the action from earlier this week on a chart of the e-mini futures for the S&P 500. Notice how Tuesday’s candle opened strongly and headed marginally higher sucking in bulls that were hoping for a continued push higher off of the momentum built up from the previous week’s close. However, price action reversed that day short of the previous highs from mid to late march and ultimately reversed course trapping many bulls that were hoping for a return to or past those recent highs. Instead, now they face the prospect of a breakdown to lower levels if the area around 1348 cannot hold as support for a third time in the last month or so.

This type of action is quite common during these phases of consolidation and can lead to many false moves as both sides try to trap each other. One need only to look back to the second half of last year to see many examples of the rampant false moves that occur during these types of periods. (The breakdowns in both early October and late November being two such traps that occurred during this difficult trading environment.) Because of this, traders that wish to participate during this type of environment need to truly understand the games that are being played by both sides and have a thoroughly developed trading plan to insulate them from the many traps that occur during these market stages.

As we head into what promises to be a tricky time next week, remember to try and understand the psychology behind the candles on a chart instead of just looking at a bunch of lines and numbers and trying to figure out what will hold or not hold.

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Posted in Blog, Charting & Analysis, Charts, Commentary, Futures, General Trading, The Week In Crayons