The Week in Crayons

We kicked off the new year with a bang in the markets as we quickly overcame the whimper of a close to 2012 during this week’s holiday shortened session. All the fears of being driven off the Fiscal Cliff were alleviated with the usual last minute kick the can down the road plan by our intrepid congressmen leaving our markets free to resume their march higher. The small caps (as measured by the Russell 2000 index) have already pressed to new highs, and it seems like only a matter of time before its counterparts also press past our 2012 highs. While things are looking rather bullish at the moment, traders that were lightly exposed to this move should exercise patience and wait for some sideways action or slight pullback to reposition into this as it is always a bad idea to chase a move as drastic as what we saw in the markets last week.

Its amazing sometimes how one or two candles can completely change the technical landscape of a chart and that is exactly what we can see looking at a chart of the SPDRs S&P 500 etf (SPY). Last Monday’s massive bullish engulfing candle and the following gap higher transformed a chart that was beginning to flounder around no man’s land into one that is poised to surge to new highs.

I had mentioned a couple of week’s ago, that there was a band of support for SPY between $142 and $140 and not coincidentally, Monday’s candle bottomed right around the $140 level and closed just above $142 strongly reenforcing the importance of this band of support as we move forward in 2013. Note that we are now clearly above the descending trend line that held us in check for the last several months and a date with our 2012 highs around $148 is the logical next step.

The markets have begun the new year in a very bullish manner, and the wise thing for traders to do at the moment is to focus on what is happening from a technical perspective and not let the macro headlines in the news color what you are seeing in the charts. We are somewhat extended after negating a two week fall in two days, but traders should be ready to take advantage of bullish setups as they begin to appear as the market consolidates last week’s strong move higher.

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