The Week in Crayons

The markets celebrated the open of the 2012 Olympics this week by creating their own event, the Bear Toss as we rallied past three weeks of neutral trading that appeared to be culminating with a short term double top with a furious charge of buying to close the week. There has been a consistent bid supporting our markets for a couple of months now despite the broad sideways nature of the price action as we’ve slowly climbed our way out of the hole we dug in early May. Friday’s buying blasted through some important areas of supply and has now placed us in a position to retest our year’s highs at some point in the near future.

Looking at a chart of the S&P 500 e-mini futures contract, we can see that Friday’s price action broke past two considerable levels of distribution by surging past not only what had begun to appear as a near term double top just under 1380, but by also breaking past a longer term down trend which has been driving price down since late March. Beyond these levels, the next areas of significant resistance for the e-mini’s lie in the two failed pivot highs we formed in late March just under 1420 and late April around 1400. These two areas should now become magnets attracting the interest of the bulls as they attempt to push price beyond these levels and establish a new bull market. Evidence of the strong support we’ve witnessed in the markets can be seen by the steady stream of higher pivot lows and highs we’ve formed after bottoming out in early June.

However, despite the strong signs of buying recently, this market has still exhibited signs of being in a state of consolidation rather than a strong uptrend and traders should continue to treat the current environment as such until we are able to conclusively establish that a new trend has begun. Looking at each of the strong moves higher we’ve made in the last two months, we can see that in each instance, the new high was met with a quick move back down to the bottom of our channel as supply quickly overwhelmed demand once we broke past our most recent high. This action has been mirrored on the other side of the channel as well as every move down has found supportive buying just before price gets pushed to our most recent low. While we are slowly pushing higher, this type of action is more typical of a neutral nature as buyers and sellers take turns pushing each other across the edges of our range. While our two day rally to close the week broke the recent downtrend in volume showing increased participation by the bulls, Stochastics continues to show declining momentum warning that perhaps price action needs more time to fully align itself for a true break out of our multi-month pattern of consolidation.

If we can hold this week’s breakout into next week, it would be a very bullish turn of events and likely signal a move to and possibly past our year’s highs. However, because we are still exhibiting some signs of being in a more neutral environment of consolidation, the prudent thing to do would be to hope for a surge higher followed by a retest of our breakout area around 1380-1360 before positioning for a move higher. The last several months have punished any attempts to chase momentum and until we see a change in character traders should not trust the market to behave any differently.

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