Wednesday 27 February 2013
We asked a metals specialist to select two stocks of interest. BHP and RIO were the choices. Are stocks any different from futures?
Absolutely not. Why not? All markets are a function of supply and
demand. When demand is greater, price will rise; when supply is
greater, price will decline. It is the essence for any market, stocks
As a norm, we do not analyze stocks. In fact, we know nothing about BHP and RIO, beyond assuming they are mining stocks. Our premise is,
when you reduce any market to price and volume, you get the most accurate information available in order to make buy/sell decisions,
regardless of whatever is being analyzed.
Most tend to view fundamentals as a true measure for future price
prospects. Many use technical analysis to interpret, even "predict"
where price is likely to go. We use charts, a form of technical analysis,
but not in the traditional sense. The most important elements for
understanding the markets comes from reading the price and volume
relationships in developing market activity. There is no need for
artificial tools like RSI, moving averages, Stochastics, MACD, etc, etc.
These are all mechanical measures, using past tense activity imposed
upon present tense prices to somehow "understand" future
development. We view them akin to a stopped clock that works with
precision, twice a day. Not so much for most of the other times.
When those with access to the most information, with the smartest
analysts, and the greatest amount money to spend for research, the
controlling influences behind a market, decide to use that information
by placing orders buy or sell, all decisions are translated into price and
volume, and they immediately become a permanent record, along with
all other buys and sells that comprise the overall market.
What we will call smart money cannot totally hide what they are doing
because activity can be tracked by reading the interaction between
price and volume. All controlling sources require volume to execute
their trades. Great effort is made to "disguise" their hand, but they are unable to hide from the volume trails left behind. We may not be privy
to those who make all the important decisions, but we get a proxy
"view," as it were, by looking over their shoulder as they execute in
If one knows what smart money is doing, one need not know anything
else about what is being traded. We put that hypothesis to the test
with BHP and RIO.
Higher monthly time frames are used to put a market into a context. It reveals the trend, if any, and important areas of successful or failed
activity that may impel or hinder present tense developing market
activity. The information gleaned is strictly what the market is saying
about the collective participants.
What immediately stands out on the monthly is a lack of a defined
trend. A closer look at bar activity since the small range 2011 high
shows how price moves down easier than up. The wider range bars
occur when price moves lower showing [EDM], Ease of Downward
Compare the single down bar in May 2012 and how it took seven
months to retrace that one month. The rally from that low has been
labored, which is what the market is saying.
The weekly provides greater detail. August of 2011 is when price really accelerated to the downside, a definite sign of weakness. Be aware
that most of what we say is based upon factual and indisputable
market data, and from these observable facts, inferences can be
Volume increased sharply on the decline. Pay close attention to
exceptionally high levels of volume because it is generated by
controlling influences, what we call "smart money." Mention was made
that smart money cannot always hide its hand because it needs to
transact so many shares. In this instance, smart money was bailing.
This is confirmed just three weeks later when a retest rally fails to go
any higher, and that sets an area of resistance moving forward. We
use that failed level to draw a horizontal line in order to observe how
price reacts to it in the future.
In January 2012, the rally stops just short of the upper resistance line, that inability an indication of more weakness, and another horizontal
line is extended into the future from that lower high to observe future
price behavior as it approaches this lower resistance area.
From the 2012 mid-year low at 60, we see a labored rally back to the
lower of the two failed price areas, and BHP cannot even reach the
highs of the second area, again. The market is telling us to expect
more weakness. That observation is confirmed by a move sideways for
seven weeks. In the 8th week, the market reinforces its message as
price drops sharply, the EDM erasing the previous 10 week's effort to
Support comes in at the 60 area, but a look at the daily says some
potential support exists a little higher.
The daily is an example of why you should always start with higher
time frames. Taken by itself, it could be said the daily has been in an
uptrend until January 2013. An awareness of the higher time frames is
so important, for this reason.
The 10 week sideways activity failed at an obvious resistance area a
fact known from the weekly and monthly charts that is not apparent
on the daily. One thing known about smart money participants is, they sell high, buy low. Would you imagine smart money was actively buying just below resistance? More than likely, the public were accumulating long positions, and now, they are trapped.
The small range at the 80 plus high, seven bars ago, just under known resistance, was a huge red flag. Small ranges at highs is the market
letting us know that demand just is not there. If you did not sell by
the end of the day, BHP was a definite sell on the opening, next day.
There has been a small measure of support around 74 -75, but when you compare it to the decline from 80, this has been a very weak
response, at best, and more weakness is likely to follow. A look at
Wednesday's intra day activity, 27 February, when this was written,
shows immediate resistance at 76 and 78. How price responds to these areas will provide yet more information about what to expect, moving
Again, all of the information gathered is coming from the market. We
do not even have to know if this is BHP, AAPL, or corn futures. All
markets are a function of supply and demand.
There are obvious similarities between BHP and RIO. The resistance
formed in April 2010 became support, once price rallied above it in
October. This is pointed out because that price level was where
support broke down dramatically, at "A," and persists as resistance
to this day. The market's present is almost always related to its past,
in some way, and those Remembrances of Things Past, [Marcel
Proust], is the market's way of offering important guidance for making
The failed probe higher in January 2012 confirmed the importance of
the 61+ area as resistance. The wide range EDM decline in May 2012 is the market telling us sellers are in total control. This, too, was
confirmed by the labored rally over the next 8 months to retrace what
was lost in just one month.
We thought we had downloaded BHP by mistake, the charts look so
similar. Comments on the chart pretty much tell what is needed in
order to know if one should be a buyer or a seller, all based on
feedback from market activity.
The zig-zag lines from the November low connect swing highs and
swing lows. The easiest definition of a trend down is lower swing lows
and lower swing highs. The daily just made a lower swing low, and the
fact that price has not rallied away from support is telling us RIO
continues to be weak.
The sharply increased volume in February, the highest since December,
occurred as price declined, the market's way of letting us know that
sellers remain in control. 55 is immediate resistance on the daily, if RIO
can rally, and even stronger resistance is at 56 -57. If 52 - 53 fails to
hold, price can decline back to the weekly TR low, the 41 area.
The market offers the best and most reliable information. One can be
oblivious to the fundamentals, as we are, and still be able to operate
quite well in knowing when to buy or sell.
As an aside, some see metals stocks as an alternative for owning the
underlying metals. They are not. Each should be treated separately,
based upon individual developing market activity.