The Week in Crayons

While we didn’t see the explosive action in the markets this week that we saw to start the year, the market nevertheless showed us its strength by virtue of its refusal to backtrack or stall out as we push towards new highs. The rally did offer the briefest of respites to start the week with a slight drift lower, but buyers emerged quickly and pushed us to new highs for the year to close the week. We are now very close to our highs from 2012 and look primed to visit them shortly, but still remain somewhat extended from our sharp run to start the year and those that didn’t buy this weeks small dip are likely frustrated as they watch the markets continue to rally. While this market is starting to have the look of one that wants to drift slowly higher and continue to frustrate those uninvolved, the wise thing to do if you find yourself watching from the sidelines is to wait patiently for another dip to provide a good setup. However, despite this, traders should not ignore great looking setups in individual names right now just because the overall markets may be a bit stretched right now.

Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see that while price action can be considered somewhat extended considering how far we have come from our last real pull back in price at just under $140 and the fact that the stochastics indicator is giving an overbought signal, we also have just broken out of a “high and tight” bull flag pattern of consolidation which is typically a strong sign for the continuation of a trend. Volume was a little light this week which is typical for periods of consolidation, but somewhat suspect when pushing to new highs. However, in the end the only thing that pays is price and as I mentioned earlier, we may be entering one of those periods in which we see a low volume drift higher much like we did at the start of 2012.

The most relevant levels of support and resistance for our current environment are represented by the red horizontal lines on the chart and each of these should serve as a strong point of contention between the bulls and the bears if and when price reaches it. The most immediate level to watch is of course our 2012 highs around $148. We are very close to them already and chances are we will contend with them very soon. The best case scenario would be a tight consolidation right at these levels much like the action to start this week followed by a surge past it. However, if we blow right past this level, a pull back and retest of the break out would yield a high probability setup for patient trader. If we cannot push past this level, our nearest level of support is right around $145 which is the bottom of our opening candle for this year and the edge of the massive gap it created. Our brief pull back this week came close to this area and buyers immediately appeared and pushed us to new highs with out allowing price to even explore that gap, so chances are that a revisit of this area will likely find more buyers ready to jump in.

We have started the year in a very bullish fashion, and while we didn’t rally substantially higher this week, we did push to new highs after a brief consolidation in a mostly sideways manner. While on the face of it this is supposed to be the easiest market to trade, it can be profoundly frustrating to traders that missed the boat and find themselves on the sidelines waiting for the pull back that never comes. However, if a trader can remain patient, this type of environment provides ample opportunities and traders should scour individual names for setups on a daily basis instead of lamenting the trades that have left them behind.

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