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Minyanville's T3 Weekly Recap: Suddenly Erratic Market Building Wedge Pattern


The current trend makes sense after the relentless grind higher in January and the first three weeks of February.

Drama was in no short supply this week after a sleepy start to the 2013. Monday we got the sharpest decline of the year, which was promptly erased in only two sessions. Then this morning, futures were down almost 10 handles at one point and still opened sharply lower, but we were able to rally to finish in positive territory. Traders complaining about a lack of volatility got what they wanted, and hopefully they were careful about what they wished for.

Ranges and volatility have increased in the S&P (INDEX:.INX), but ultimately the index now seems to be building a big wedge pattern. A wedge pattern by definition is a pattern of indecision and digestion, which makes sense after the relentless grind higher in January and the first three weeks of February. When a wedge pattern forms and stocks bounce around within the constraints of the formation, we tend to take more swing trading risk off and take a short-term tactical approach. Rather than looking to trade breakouts and breakdowns, perhaps take a contrarian view at extreme sides of the pattern.

There were several catalysts for today's price action. The sequester has been the media's latest obsession, and today the deadline came and went for lawmakers to come to a compromise to avoid the automatic spending cuts. Many pointed to the sequester as a reason for the gap down. Then you also had some weak economic data out of Europe and Asia, which I think was actually the more direct cause of weakness. However, during the session we got the strongest ISM Index reading in 20 months, which helped accelerate the market's recovery from the gap down. The manufacturing survey is often looked to as a leading indicator the economy, so it is very bullish to see such a strong reading.

There are lots of strong stocks out there to trade. I think in this area, you have to take either a very long-term approach or a very short-term approach.

Google (NASDAQ:GOOG) looks like it's only a matter of time to take out it year's high of $808.50ish.

Amazon (NASDAQ:AMZN) continues to act better as it builds a base following earnings.

LinkedIn (NYSE:LNKD) has made another historic high and has been the strongest stock in the market over the last two weeks.

Facebook (NASDAQ:FB) finally started to act better today. The stock had a nice Red Dog Reversal yesterday, then triggered long out of a descending channel above $27.30. It's a start for this stock that has been correcting since earnings.

Yahoo! (NASDAQ:YHOO), after inching towards the breakout level yesterday, got going today and made new 52-week highs. Investors seem to be putting their faith in CEO Marissa Mayer, the former Google executive who is cracking the whip with YHOO employees, forcing them to work on site in Yahoo! offices.

Apple (NADSDAQ:AAPL) I talked about Apple in today's Morning Call as a screaming short, and we got that downside follow-through today. Many traders are conditioned to trade AAPL exclusively from the long-side, but the chart is clearly bearish. The stock broke below that key $435 support level today, and looks like it wants to fill the gap down to around $425.

Banks seem to be really driving the market right now. Most of the banks had sizable gap downs this morning, but were able to bounce to lead the market back into positive territory. Bank of America (NYSE:BAC), which had been one of the weaker names in the group, was one of the most heavily traded stocks in the market today as it bounced strongly before closing a bit off highs.

The Homebuilders ETF (XHB) is holding higher and needs to stay above $27.80ish to get more constructive.

Metals are now down three days in a row and the Gold ETF (NYSE:GLD) low is $152.14.

It still amazes me how many naysayers there are out there, or how many individuals are frustrated when we some indices at historic highs and some are on the verge of it. Trade your time frame and ignore the noise.

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