The Tug-o-war Between Support and Resistance

It is interesting to note the slow and steady increase of support that is occurring in the broader market.  In the middle of October, the 50 day EMA provided support.  As we entered a symmetrical triangle consolidation pattern, the up trendline then functioned as support for prices.  Now as the apex is approached, the 20 day EMA is serving as support.  This correlates to the slow erosion of the VIX over that period of time.

Prices respond to volatility by reflecting the mood of the investors who make up the market. As you are aware, when these price and volatility swings become violent, fear increases and rationality decreases. Profitable trades become sporadic, eventually causing investors to run for cover. In this way, volatility functions to erode the confidence of investors. Without that support under prices, they eventually succumb to downward pressures.

With prices buried in the protective barriers of the up and down trendlines, current price swings and volatility appear to be muted, thus providing that confidence as evidenced by the varying levels of support. 

This strengthening is one more encouraging piece of evidence, coupled with the uptrending MACD lines, to support a bullish resolution.   Perhaps not this week though.  With options expiration on Friday, they will try their best to contain prices within this triangle so that the massive calls above and puts below expire worthless.  Monday will then be the day of reckoning.

Stephen M.