The Week in Crayons

After desperately clinging to the support area formed around our September breakout to new yearly highs, the bulls finally gave up and let the bears take us lower in the markets this week. The high volume sell off culminated with the weak close on Friday that basically erased what was looking like a promising morning rally. Hopefully readers of this blog have limited their exposure to the current environment as I suggested a couple of weeks ago noting the increasing uncertainty in price behavior. While things are looking dire as we continue to experience heavy selling, we are probably close to a near term technical bounce as the markets attempt to get a breather from the recent bout of selling, however due to the recent weakness in the markets it is probably better for traders to continue to participate as lightly as possible in the current market and wait to see if and how the coming bounce shakes out.

Looking at a chart of the SPDRs S&P 500 etf (SPY) we can see just how ugly this week really was by noting the huge volume down days that destroyed the attempt from early in the week to rally back above the key support area around $142. Because of the way overhead supply completely overwhelmed demand at this area, this price level will now become a critical level of resistance for the bulls to try to recapture as we close out the year.

While the near term trend is now pointing downwards, we find ourselves at the 200 day moving average on SPY which should serve as support as it is typically used by many institutions as a bellwether for the health of an equity. We also remain oversold on the Stochastics indicator telling us that selling pressure could abate soon as the bears take profits and wait for new opportunities. Also, while high volume selling is usually a harbinger of an extended period of selling, huge spikes in selling volume are often signs of capitulation as the bulls give up and bow out of their equities. While true capitulation usually only occurs after a bear cycle in an equity, volume spikes like the one we saw in the markets this week tell us that many short term bulls have given up and closed out their positions which should relieve a lot of the downward momentum the bears have gained recently as new traders step in at what they consider to be fair prices. Because of these factors, we are likely to experience some sort of relief bounce in the markets soon, but instead of viewing this bounce as a trading opportunity, astute traders should instead watch how this bounce plays out as we continue to reassess our new environment. The critical levels to watch right now are the recent scene of our breakdown around $142 and the area around $135-$136 which was reasonable support for the markets during the early part of the year. A weak bounce that stays below $142 likely would likely serve as a good shorting opportunity, while a further drop should not be chased as momentum should decline soon.

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