Beware Events Causing Volatility in the Week Ahead

The SPYs topped out in near 134.5 and have fallen to 125.5 -- a drop of about 6.7%. The IWMs -- which led the market higher -- have fallen from 83.5 to 78 for a drop of 6.6% and the QQQQs have fallen from about 59 to 54, or a drop of about 8.5%. All three averages are below their respective 10, 20 and 50 day EMAs. The volume reading on all the averages have been elevated. Right now, this is a standard correction that cleans out some of the shaky money. In fact, as the blog Traders Narrative notes, current sentiment readings are pretty bullish from a contrarian point of view. The real question is how far will it continue. For the SPYs, there's strong support in the 127 and 124 area, making them key support levels for the week. On the upside, the primary question is will the averages close above or below the EMAs?

The IEFs are now above the 200 day EMA and are forming a short, downward sloping, pennant formation. The close above the 200 day EMA is technically significant as it indicates a possible shift from a bear to a bull market. I still think this rally is short-lived and more a reaction to world events than a rethinking of the economic background. However, the key point moving forward for this part of the market is what happens when prices -- which are currently moving downward -- hit the EMAs as the pennant moves lower?

Oil has fallen from its sharp highs caused by the Libyan situation, but is still consolidating gains above the $100 handle. The key technical areas with this market are the 106 level -- where prices reached their latest peak -- and 98 -- where there is a lot of technical support and is also right about the current 50 day EMA. Movements within this boundary are pure day to day noise. As always with this market, be cautious as there are plenty of wild cards in the mix.

The UUP closed below the 22 area which is a very important long-term technical support area that was first established in 2008. This ETF does not correspond directly to the U.S. dollar index, but is handy because it allows trading for retail investors in the currency market. The close below a major technical level is always a bearish development, and this time is no different. Expect a retesting of the 22 level at some time in the next few weeks.

Basically, we're in the middle of a pure market correction that looks an awful lot like profit taking. We've had a good run in the equity markets for some time, so a selling period is welcome and warranted - as is the sell--off in some of the commodity markets. Current world events have put a safety bid in safer assets like the Treasury market. So long as the activity is disciplined we're fine. What we want to be on the look-out for is the random, wild card event that adds to volatility.