The Week in Crayons

Friday’s bounce higher added yet another specimen to our recent collection of large candles in the broad market indexes.  Highlighting the wide disparity in opinions of fair value in our current markets, we continue to have strong intraday trends up and down as we work our way higher from the lows we printed at the beginning of June.  While our recent dips are finding solid support, there are mixed signals warning us that we are still in a corrective range as price tries to find equilibrium after the big moves from the first half of the year.

Looking at a chart of the S&P 500 e-mini futures contract, we can see the recent strength in the markets by observing the rising channel that has defined our price action since we formed a near term bottom about a month ago.  While price was rejected a couple of weeks ago as it probed into our prior range from earlier in the year above 1360, we found support relatively quickly forming a higher pivot low this week.  If price were to conform to this rising channel, we should expect to reenter our range on the next move up and continue beyond our most recent pivot high just under 1380.  However, while we have been firmly moving higher over the last several weeks, we still face considerable amounts of supply above us as signs of weakening momentum are emerging.  Looking at the Stochastics indicator, we can see that while it has been steadily rising along with price over the last couple of months, it is now slowing down as it begins to dip below the pace it has followed throughout our recent rally.  Another sign of waning momentum can be seen by the yellow and red candles popping up on our Stockguy 22 Momo Trend Bars as our recent thrust higher begins to mature.  While declining momentum does not necessarily imply that price will follow, it nevertheless serves as a warning that price may soon decline as well.  Another sign warning us that we may aren’t fully ready to resume our bull market at the moment is the declining volume as we push higher into resistance.

While it is certainly true that only price pays and that we have often rallied on low volume over the last few years, the declining volume mirroring our recent move up is telling us that we may not have the buying conviction necessary to push us through the highs we printed earlier this year.  However, we have seen strength return into the markets after the decline we witnessed in the spring and these mixed signals we are seeing emerge should be interpreted more as a warning that we are still mired in a pattern of consolidation, not necessarily ready to reverse lower.  The next major test for the markets will come in the near future as price will have to breach either the bottom of our near term channel or the top of the descending trend line that has contained our price since we formed our 2012 highs in late march.  A breach of our most recent pivot high would also be a break above our larger time frame down trend and likely lead to a continued push to our highs from earlier in the year.  A break below our most recently formed pivot low would likely lead to at least a retest of our 200 period moving average around the 1300 price level along with the potential for some messy price action as the bears try to regain control of the markets.

These two trend lines are forming what can be interpreted as a larger symmetrical triangle pattern of consolidation that we have now been forming for several months.  We are nearing the apex of that triangle and many of our significant moving averages are coiling closely together as price converges.  Because we are still in a larger pattern of consolidation, traders should continue to maintain a cautious posture as this type of environment is filled with fake moves as price tries to find equilibrium.  With a new earnings season beginning and election time approaching, traders should keep a close eye on price behavior as we begin to contend with the edges of our range of consolidation as the potential for a new move in the markets is likely to develop over the next couple of months.

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