2011 was certainly a pretty tricky year and as we get ready to kickoff the 2012 trading year, it only seems fitting that the market indexes are stuck in no mans land with a 50/50 shot of going in either direction. Many traders found 2011 extremely challenging and I while I had a decent year overall, I have to admit that late November and early December dragged me down. It seemed that for the second half of 2011, the markets could not string more then a few days trending in any direction. There are a lot of different reasons that could explain the markets behavior this year, but in the end, traders simply had to adjust or get chopped to death.

Looking back, the markets basically traded in two distinct ranges. In looking at $SPY as a market proxy, notice how the markets traded in a consolidation that proved to be a top the first half of the year. Volatility increased in May, flashing a clear warning sign. The ridiculous moves that ensued the rest of the year is what threw many traders off. While many braced for a meltdown, the markets ripped shorts apart in October and then chopped around. In the end, two distinct bases have formed, separated by the $125-$127 level (basically 1250-1270 on SP500). $SPY is wedged right up against this level and it really could head in either direction at this point.

Drilling down in the daily time frame, there are some positives to consider. $SPY has been setting progressively higher lows and recently reclaimed its 200-day moving average after struggling with this level for several weeks. It also reversed impressively at the end of the year as it pulled back to fill an open gap near $120. That being said, it really needs to clear the $127.50-$128 area to set that higher high and possibly establish an uptrend. With the bipolar tendencies this market has displayed, one can not rule out a gap up reversal that takes the markets back down either. Breaking under the $120 level looks like the clear area where things would be going wrong for market bulls in the near term.

I don’t know if the markets are going to break higher or lower, and judging by the wide range of bullish and bearish tweets, posts, and comments so far this weekend, it seems opinions are widely split.

What I do feel confident in is that the character of the market has not changed yet, and chasing any move in any direction is likely to get punished. That has been the clear message for months, and nothing has occurred to dispel that notion. I am slightly positioned long for now, but overall the amount of individual charts that look good to me has dwindled dramatically. Until this changes, it is hard to get behind a breakout.

Good Trading,

Joey