The Week In Crayons

Well, apparently the Mayans got it wrong as the world didn’t end on Friday as scheduled. However, a sharp gap down on Friday did threaten to end the trend higher we’ve seen in the markets throughout the holiday season. While we finished the day strongly and well off the lows, this is now the second week in a row which begins with a nice rally only to give back a substantial part of the gains by Friday’s close. While this isn’t really surprising over even necessarily bearish as we run into resistance near this year’s highs, it is hinting at a possible end to our current thrust higher and a new session of consolidation as price attempts to find equilibrium at these levels. Considering that we are heading into a couple of weeks of shortened action thanks to Christmas, New Year’s Day and their respective eves all falling on normal trading days, there is a strong likelihood that we may spend the next couple of weeks disjointedly drifting up and down between the support levels we are currently just above and the recent areas of resistance that we just failed to break through.

Looking at a chart of the SPDRs S&P 500 etf (SPY) we can see that buyers emerged during Friday’s gap down at the top of a pretty substantial zone of support between $142 and $140. This area has been a critical zone of price action throughout the year and is likely to continue being significant into 2013. Considering the benign nature of typical holiday trading sessions, I would not expect us to break down below this zone into the close of the year. Another form of support lies just below us in the form of several longer term moving averages that are slowly rising to catch up with our recent move up. While the 50 day moving average will be of more immediate concern over the next few days, the 200 day moving average will serve as more critical test of the the market’s strength when price next tangles with it. I suspect this test will come during the early portion of 2013 as momentum has been slowing down even as we have pushed higher throughout December. Notice the divergence between the Stochastics indicator which has been slowly declining while being overbought throughout the rally higher we have seen in the markets all month. We also saw the first appearance of a yellow day in the Stockguy 22 momo trend candles indicator, another sign of waning momentum. While these signals don’t necessarily mean we are reversing lower, they do hint at upward price action slowing down and traders should be wary of blindly buying here.

The first level to watch to the upside would be around $144. If we can get back above that area, it would confirm our break out of the descending trend line/triangle that has held price in check for most of the second half of 2012. If we can hold above this level to close out the year, even if it in a listless sideways drift, it would go a long way towards erasing some of the negative signs mentioned earlier and setting us up for a sustained push higher into next year. Last week’s highs just under $146 would be the next point for the bulls to reclaim and pushing past this would likely lead to a retest of the 2012 highs around $148.

Because we are due for some consolidation after a strong rally over the last month or two and heading into what is likely to be a lightly traded close to the year, traders should relax and participate minimally over the next couple of weeks and enjoy the holidays while preparing for 2013. Congratulations on surviving another year of trading (and the Mayan Apocalypse) and have a Happy Holiday Season.
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