Sunday 7 April 2013
Salivating Bears have been calling for a market top for over 4 years, now, and none have been right. The sentiment is understood but
misplaced. This goes to show how markets are not predictable, but
people are. So many want to exercise the FILO inventory premise:
First In Last Out. It is so difficult to check egos at the door for
there is a huge difference in being right and being profitable.
Those who choose to be right often find themselves on the loosing
end. Those who choose to be profitable always have a game plan.
Game plans rarely pick tops or bottoms, the most unprofitable areas
for trading. The best source for market information comes from the
market itself, and from what we can see, there has been no
indication that a top has formed. It is possible the market is getting
there, but getting there and being there are not the same. Always
stick to a proven game plan.
The message of the market is best viewed from the charts, and we
are using the E-Mini.
An associate of ours has observed that market rallies tend to last
15-20 weeks, and the current rally is in week 20. A correction, of
some sort, is now due, this week, next week, it cannot be known until it happens, but the Time factor is ever-present.
Last week was an OKR, [Outside Key Reversal], defined by a higher
high and lower low from the preceding week, and in this one, a lower close, [the close can higher, lower or unchanged]. The word
"Reversal" provides a clue as to near term expectations. Not ours,
necessarily, but as in the acronym, OKR.
The one factor outweighing the rest is the trend, and the trend for
stocks is up. Trends tend to persist, and it takes time to turn one
around. Time equates to patience, and it is patience that is the
undoing of a great many traders. There have been so many calling
for a top, as we have observed from comments and expectations
over the last 4 years.
In an up trend, demand is already a proven factor. It is supply, or
sellers who bear the burden of proof for making a change, and that
has not yet happened. The groundwork already exists for a
correction, but it is impossible to know, in advance, if it will be a
normal correction, and lately, they have been 9-10 days in duration, or if it will signal the potential of a topping formation.
Identifying the trend as up does not mean one should not be
cautious or unprepared for a market turn, but the caution would be
in the form of taking profits and/or using close stops. It does not
mean going short. Even the 2008 market top took a few months to
Upside momentum has lost a few steps in the current rally. In the
rally leading to swing high 2, note how the bars were steadily
higher. In the current rally, the bars have been higher, but mostly
overlapping. When bars overlap, it indicates a greater struggle
between buyers and sellers, but so far, buyers have prevailed.
The bulk of the rally to swing high 3 began when price broke above
swing high 2, at the beginning of March. The high of 2 has been
support, seen at arrow 1. Friday's decline is still above that price,
1529 area, and the entire box area is above 2, which is a bullish
sign. It may not hold, but until that event occurs, we can only
judge the market by the facts as they presently exist.
Friday's sell-off closed above the half-way point of the range, and
that tells us buyers are still actively present, even if the buyers are
only the Fed. If sellers were in control, the close would have been
lower. Based on the trend, we could be looking at an opportunity
to buy on Monday.
The 1529.50 low of 15 March is likely to offer support on a future
retest, horizontal line extending to the right. This makes Friday's low very interesting. One measure Connie Brown, Aerodynamic
Investments, uses is equality between swings. The decline of "A"
was 24 points, as was the decline of "B." Based on this, at least a
reaction can be expected, at a minimum. [Never forgetting
"Anything Can Happen" in markets, it can also fail.]
The highest volume occurred at the low, and that begs the
question, who do you think creates volume? The short answer is
what we like to call "smart money." The public tends to follow, not
lead. The Friday low is above the 15 March support, telling us if
sellers were in charge, why couldn't they press the market lower
and take advantage of their selling momentum? Maybe because
sellers do not have the momentum.
The reaction off the high volume low was immediate and to the
upside. If we see a light volume pull-back on Monday, with smaller
intra day ranges, it could offer a low-risk buy. As was stated in the opening second paragraph, having a game plan is essential to being
profitable. It is not a guarantee for profit on every trade, but the
consistency in application is a winning combination.
Developing market activity is always the most reliable source for
information and the best guide.