The Week in Crayons

It seems that many continue to doubt this market despite the fact that it continues to march higher week after week. A pattern which continued this past week as we pushed to new highs most of the major broad market indexes. The bears continue to get pummeled by the bulls right now and have been unable to sustain any kind of push down in retaliation, as we have yet to experience even a run of the mill pull back at the moment. Yet much of what I hear right now is that we are at resistance and could face another fiscal cliff-like event soon. I’m pretty certain that this doesn’t qualify as the type of in depth analysis a trader should use to try and foolishly pick a top in the market. Could the market top out here at the highs and reverse lower? Of course its a possibility, but all the technical evidence right now points to a continued move higher as this market has done nothing but act strongly since the turn of the year. As I’ve mentioned often in the past, traders need to ignore the macro headlines in the news and focus on what the charts are telling us. Do not ever forget that much of what you see in financial news is there to bring viewers in, not necessarily to objectively describe what is happening in the markets.
Looking at a chart of the SPDRs S&P 500 etf (SPY), we can see the strength in the markets as evidenced by the steady stair step climb higher since the massive gap up to start the year. Huge gaps like this usually need time to unwind and find a new equilibrium as market participants come to agreement on whether or not this new price neighborhood represents fair value. However, we have seen nothing of the sort so far as it has taken no more than a couple of days of falling prices before buyers eagerly jump in and drive us to new highs. This week, it took even less as all that was necessary to spur the dip buyers into action was a couple of overnight gap downs. This is showing us that there is a very strong demand for equities right now and that this rally should not be doubted until we see evidence begin to emerge that points to the contrary. That strong demand finally pushed SPY past its 2012 highs this week, a moment that seemed inevitable over the last couple of weeks.

We now sit right around those highs, and because there are several possibilities as to how price will react at such an emotionally charged level, it is probably better to step back and observe how it behaves here. Because of the way price has behaved recently, the likely scenario is another few days of tight consolidation followed by a probe higher and past the 2012 highs. However, there is also the possibility that we immediately push higher to start the next week and leave those hoping for a reasonable entry standing on the sidelines as we scream higher. If this were to occur, those left uninvolved would be better off waiting for a pull back and retest of the $148 area over chasing price higher. Lastly, there is of course the possibility that we are rejected at these levels and fall back from here. If this were to occur, we would likely find initial support around the bases of the last two “stair steps” at around $147 and $146. More substantial support would likely reside just under $145 where we would not only find our rising 20 day moving average, but also the top of the gap created by our 2013 open.
We’ve done nothing but rally to start the year so far, and traders should continue to watch what the tape is telling us instead of letting the pundits color our perception of what is happening in the markets. While those that continually call for a top will eventually be correct, it is an act better served for those that are looking for headlines rather than those looking to profit from the market.

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