The Week in Crayons

Friday’s monstrous move higher in the markets cast a positive light on not only the week, but also on the entire month, capping a strong run off the lows we printed for the year at the beginning of June. In fact, the positive glow radiating from our huge move also served to lessen the ugly look of the second quarter of 2012 which also came to a much rosier end on Friday regaining about a quarter of it’s total losses from top to bottom in a single day. Either this was the mother of all window dressings or the market has turned yet another corner in resuming the bull market rally that began the year. While we saw some very positive developments this week, there are still some mixed signals telling us that we have some hurdles to clear before we are done with our current pattern of consolidation.

The extent of Friday’s move can be seen instantly as we look at a chart of the e-mini futures for the S&P 500. Last week, I alluded to the fact that we had recently seen the four biggest candles of the year printed on the S&P e-mini futures contract, illustrating the widespread disagreement on a fair value between traders. While Friday’s candle was the largest yet, it comes on the heels of one of the other huge candles from just a week earlier letting us know that while we may have surged higher, sentiment continues to vary wildly from day to day. As I have mentioned before, this sort of volatile herky-jerky action is more characteristic of an environment of consolidation rather than a smooth trend giving us a clue that perhaps there are some more traps waiting to be sprung by the markets before we are clear to resume higher. However, our most recent turnaround has now formed a clearly higher pivot low letting us know that bullish sentiment is slowly overcoming its bearish counterpart.

We now find ourselves just under the floor of our springtime range and reclaiming this level would be the next big step in setting up for a rally into the latter half of 2012. This price level around 1360 is now our near term ceiling while our recent pivot low around the big fat round number of 1300 should serve as our near term floor. While Friday’s action was incredibly strong, and the potential for a surge higher past these levels is very possible, be wary of chasing price into resistance as we are still technically in a ranged environment. There are still some considerable amounts of supply overhead, and if we can drift into this level in a benign fashion as buyers absorb the glut of sellers waiting to unload their positions, it will go a long ways towards setting us up for a high probability move in the near future, especially if volatility can die down during this process indicating a growing consensus on fair value. Next week is a holiday week and will likely be characterized by light trading volume so traders should be wary of any odd moves especially at the beginning of the week.

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