The Week in Crayons

While the positive action in the markets recently has many thinking that the road is clear for our recent bull market to resume its climb higher, many signs indicate that our current environment is actually still one of sideways consolidation rather than a resumption of the prior trend. I pointed out a couple of weeks ago that we appeared to be setting in a nice bottom off of the bear trap formed in the first few days of June, and while we have seen a move higher since then, the nature of the action has been more telling of indecisive back-filling and testing of prior areas of support and resistance. Also, volatility has continued to grow as we’ve alternated up and down days as price action ping-pongs back and forth between several important moving averages. In fact, the four most volatile days of the year have all occurred during the month of June clearly letting us know that there is no consensus between market participants regarding a fair value for the markets at this time.

Looking at a chart of the e-mini futures for the S&P 500, we can see four very long candles formed this month, two formed around the critical bottom we appear to have formed around 1260, and the two most recent candles being down days as price action was stiffly rejected at the bottom of our range from this spring. This area now becomes our near term ceiling and while we have seen a nice move higher recently, these candles are reminding us that there are still very strong areas of distribution waiting for us as we continue to move higher and traders should still view the current environment as ranging and not trending. The rising volatility also reminds us that there are still widely divergent opinions on what exactly would represent a fair price on equities, opinions that seemingly change from day to day dependent on capricious news flow.

On a positive note, the 20 day moving average has held as support throughout the last couple of weeks and has turned upward as it follows price action higher. As negative as the price action has seemed over the early part of summer, the 50,89 and 200 day moving averages are all still properly aligned indicating that the market remains technically healthy. The next big step of course would be to reclaim the 1350-1360 level for good and begin to challenge the upper limits of our spring time range as buyers absorb the distribution waiting at those lofty levels which would bring the 20 day moving average into proper alignment as well. However, in order for us to truly be ready for a new swing higher, volatility has to quiet down as traders opinions on fair value begin to converge, a scenario that is probably still a few weeks/months away. Until then, do not get fooled into chasing moves into strong support or resistance as we continue to consolidate into the summer months.

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