Tuesday Evening 19 April 2011
A case was made for an increase in bearish potential, yesterday,
[See S & P - Battered Bears Rearing Up, click on http://bit.ly/i4qGE8],
and we projected a downside of 1240 - 1260 area +/-. Volume has
increased on the down bars for the first time since the March lows.
However, this would not be the first time that price has ignored
normal technical signs and continued in the direction opposite to
signs of weakness, thank you Federal Reserve and POMO.
One of the best things about having trading rules is to ensure
the market abides to them when analyzing a market for a position.
We were looking for a weak rally to sell, and one may develop on
Wednesday, or one may not. The 1310 are was considered
resistance and a potential area to establish a short position, but
only if the developing market activity indicated weakness. So far,
with the exception of less volume on Tuesday's rally, price has
not weakened. In fact, it closed at the upper end of the range,
telling us that buyers were in control of the day.
You can see that overnight price activity has broken the supply
line in the down channel drawn on the chart. While it is a degree
of buyer's ability to show some relative strength, the more
important area of resistance comes in at the 1320 area +/-. It is
from there that price sold off on 10 April, and again when there
was the sharp sell-off on Monday. The ease of downward
movement from 1320 that day should be defended by sellers,
and that is why that level may be a more formidable area of
With this knowledge, guesswork has been eliminated. All we
need do is wait and observe HOW price responds/reacts to that
potential resistance, if at all. Once we see the character of
response, it will become more apparent on what to do, if anything.
Just because an area may be identified as resistance does not
mean sell orders should be placed there ahead of time. Even
though it is presented as potential resistance, the market may
ignore it, and the potential will not be realized.
We have said it before: Let the market lead and follow a step
behind. It can be costly to be even just half a step ahead. It was
an observed condition of the weekly chart, today, that has
tempered the enthusiasm, once again, for the short side of the
market. If weakness becomes apparent, a short position will be
initiated, but not until.
There is a concept in technical analysis that indicates the strength
of a bull market, and it is called "spacing." Spacing exists when the
low of a swing is higher than the previous swing high. The previous
swing high was in April 2010, and from it, we drew a horizontal line
to the right. The last swing low was a few weeks ago, in March, and
from it is drawn another horizontal line. There is a space between
the two. What it says is that the March correction showed a sign of
strength as buyers were strong enough to support price, on a strong
sell-off, we might add, without reaching the previous swing high. This
is an indication of a relatively strong market.