U.S. equity indices have traded in a choppy, sideways trend for the first 4 days of this week as the clowns in Washington D.C. consider exactly how badly they want to screw up the economy for 2013 while debating the fiscal cliff.
This day-to-day back and forth between the 2 political parties probably makes for good ratings for financial TV, but it roils the markets. So after the markets put in deep "V" patterns recently, this uncertainty has lead to a period of sideways to slightly downward trading in markets this week.
These deep "V" patterns are not the typical action you like to see at market bottoms. As I mentioned in my last post, I'd rather see some sideways backing and filling as the markets try to stabilize and form a new base for a move higher.
Despite it's choppiness, as I see it, the trading so far this week is actually constructive. It has many traders skittish and worried, and many of them on the sidelines. It has allowed for some profit taking after the sharp run up off the lows. And it keeps the traders that actually are trading in a very short term frame of mind.
All of these things add fuel to the fire for a rally if the indices move above recent resistance areas. For the Russell 2000 (IWM), the first key level is at the $83-84 area. For the Nasdaq Composite (COMPQ), the first key level is 3050-3100.
One thing I've noticed is a subtle positive divergence developing in RSI 14 readings. As the chart of IWM shows, the recent reading is higher than they were at previous 3 recent higher price areas.
This first chart is from August 2 when I put it on Twitter. It shows the important level that needed to hold for the rally to continue, and it did. The recent bottom in the IWM came down to that exact same level.
Click on charts to enlarge:
The second chart shows my current take on IWM.
Another interesting development is the surprising recent strength in the financials (XLF), primarily in BAC and C. This may mean that trader's concerns over the fiscal cliff are exaggerated at the moment.
Ideally, I'd like to see the market continue to trade sideways and chop around for a bit. This would allow for some market leading stocks to tighten their bases and offer better entry points.
So while traders have to be prepared for all scenarios, recent action is somewhat encouraging.
This day-to-day back and forth between the 2 political parties probably makes for good ratings for financial TV, but it roils the markets. So after the markets put in deep "V" patterns recently, this uncertainty has lead to a period of sideways to slightly downward trading in markets this week.
These deep "V" patterns are not the typical action you like to see at market bottoms. As I mentioned in my last post, I'd rather see some sideways backing and filling as the markets try to stabilize and form a new base for a move higher.
Despite it's choppiness, as I see it, the trading so far this week is actually constructive. It has many traders skittish and worried, and many of them on the sidelines. It has allowed for some profit taking after the sharp run up off the lows. And it keeps the traders that actually are trading in a very short term frame of mind.
All of these things add fuel to the fire for a rally if the indices move above recent resistance areas. For the Russell 2000 (IWM), the first key level is at the $83-84 area. For the Nasdaq Composite (COMPQ), the first key level is 3050-3100.
One thing I've noticed is a subtle positive divergence developing in RSI 14 readings. As the chart of IWM shows, the recent reading is higher than they were at previous 3 recent higher price areas.
This first chart is from August 2 when I put it on Twitter. It shows the important level that needed to hold for the rally to continue, and it did. The recent bottom in the IWM came down to that exact same level.
Click on charts to enlarge:
Another interesting development is the surprising recent strength in the financials (XLF), primarily in BAC and C. This may mean that trader's concerns over the fiscal cliff are exaggerated at the moment.
Ideally, I'd like to see the market continue to trade sideways and chop around for a bit. This would allow for some market leading stocks to tighten their bases and offer better entry points.
So while traders have to be prepared for all scenarios, recent action is somewhat encouraging.
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