The Week in Crayons

While we spent the better part of this week in an uneasy sideways jitter, the overall price action has to be viewed as a negative considering where we stand in the markets right now in relation to the several key technical landmarks. All is not lost yet, as some buyers are still stepping in at these levels and preventing the selling from getting out of hand. While the recent action has been lackluster to say the least, we are only about 5% from our highs and its taken almost two months to get there, so its safe to say the bears aren’t in control of the market at this time. However, the fact remains that we have encountered considerable supply just above us and have seen signs of distribution each time we attempt to push back to our earlier highs in the broad market indexes. Because our current correction has begun to linger and we are seeing signs of increased confusion regarding the current value of equities, traders should become more wary of our current environment and take a more judicious approach towards their trades until conditions improve.

Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see the increasingly confused price action clearly in the string of candles we formed as we lost support this week. While the wicks at the bottom of these candles indicates buyers stepping in and supporting us before the close of the day, we also printed new lows each day which obviously shows that that those buyers are still having trouble keeping up with the increasing supply. I mentioned a couple of weeks ago, the $142 price area was a critical level that we needed to hold as it was a point of convergence between several important forms of support. While we bounced initially from that area, we encountered heavy selling immediately, and ultimately fell below this critical level this week. The fact that we held below this level is definitely a negative from a buyers point of view and downgrades the current environment in my eyes from somewhat bullish to a more ambiguously neutral market that reeks of unpredictable action.

We are oversold right now and due for a bounce at some point in the near future. The strength of that bounce and how we react to it will be key tells on the current state of the markets. Pushing back above $142 next week would be the first step in reestablishing a healthier environment especially if we aren’t sold back down violently as we probe into the increasing levels of resistance above us. The next area of resistance after $142 would be just under $144 where our now descending 20 day moving average is getting ready to cross over the flattening 50 day moving average. If we continue to falter and lose this week’s lows, a date with our 200 day moving average just under $138 is a likely scenario. We are at a crossroads in the markets right now as we enter our second month of consolidation in the markets after our last rally and are skirting the edges of what can be deemed as healthy behavior. Because of the increasing uncertainty in the market’s behavior, the prudent course of action at this time is to step back and wait for more clarity as we reevaluate where we stand in the broader markets.

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