While many expected the markets to rally on Friday ahead of the much anticipated IPO of Facebook (FB)on Friday, the widespread selling that characterized the week continued uninterrupted right up to the close of the day while the “historic” IPO was basically a non event from a price perspective closing right around its opening price of $38. The lack of an explosive move up will likely be interpreted as a failure for the newly public company, but hey, at least it finished marginally green on its first day beating the majority of stocks in the U.S. Markets that finished red for the day. We have now seen several days of consistent selling pressure on the broad markets with very little in the way of buying support as we continue to drop lower. We have yet to see a truly panic filled drop that signifies that the bulls have fully capitulated from the highs we printed earlier this year and until we see that I would expect any bounces in the coming weeks to be met with strong selling pressure as we probe the prior support levels that will now become strong resistance.
Looking at a chart of the S&P e-mini futures, we can see that we are now clearly below the range of consolidation we had formed over the last couple of months as price action tried to come to terms with the highs we formed in late March. This recent period of consolidation can be interpreted as a head and shoulders top with the consequent drop we have just experienced signaling that we have now entered a new phase in the markets. While it is certainly possible that we are now in a downtrend, the more likely scenario is that we are now in another period of sideways consolidation in which we are close to finding the bottom while the floor of the previous range will likely now become the ceiling.
A measured move from the head and shoulders pattern we just completed would put us right around Friday’s close while Stochastics continues to form new lows indicating a strongly oversold nature in the markets. We are now approaching what should be two very strong levels of support in the 200 day moving average as well as the price levels from which we broke out to start the year and it is likely that we find support just short of those areas as dip buyers begin to reappear.
We are due for a bounce soon, and chances are that a very playable trade to the upside will present itself next week although it should be seen as a quick trade, not a chance to reposition to the upside as we are now clearly no longer looking at a run of the mill pullback within an uptrend. Because a viable support area has not developed yet, be sure to keep an eye on the intraday charts to find early signs that the recent downtrend is ending.
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