Shane E. Drozdo...'s  Instablog

 Well as we approach the holiday season I am noticing one major factor in the markets, we are sustaining these price levels with support from light volume and anxious buyers. When the market starts to rise, many more individuals jump in which means the markets behavior is slowly getting back to normalcy. However, we must see the drying up of volume as a sign of caution for its a direct indicator of low demand at these levels. Which means demand is either much higher or much lower. Let’s look at the chart to start analyzing recent market movement.

Weekly Chart of SPX

Looking at the weekly chart we can see the 50% retracement level of roughly 1,130 being approached quite quickly. With all of the technical indicators shaping up for the bullish side, we think we are going to see another run up to these price levels next week. Once it is hit there will likely be a lot of selling pressure at this point in time. However, a break out above this level would send us much, much higher. I do not see any fundamental reason in the health of the economy to sustain such a move. That being said, the market is not going to be rational all the time. Bubbles happen all the time and this could be a huge rally unfolding under our hands without any logical purpose behind it.

In order to better time entries and exits, let’s look at the daily chart as well.

Daily Chart

The daily chart is telling a very similar story. Although there was some weakness on Friday, I am still anticipating some bullish moves early in the week. Maybe not so much on Monday, but on Tuesday is my logical start point. Generally before bigger moves, there it is preceded by a move on light volume in the opposite direction to fuel a squeeze giving bulls even more control. In a market with not too many reasons to buy, a rally will need buyers trying to protect capital while short to cover and buy up shares. That can fuel a market move up quite nicely.

As we can see in the chart, we have volume drying up dramatically. I truly think we are seeing the stage in which shorts will be squeezed into a bull market rally. If we break new highs again and I was short, I’d frantically cover or place hedges on trying to protect capital, inadvertently raising market prices. So if you are short be cautious for with low volume many bulls could manipulate the market with less and less money. If you are long, keep your eyes on pullbacks and add if we hit 50DMA’s as they have been great support levels.

Good luck and happy trading!

Disclosure: No Positions