Sunday 14 April 2013
One of the best aspects of reading developing market activity is that it reduces any market to the opposing forces of supply and demand. It can be any organized market, anywhere. The factors of fear and greed universally apply to all investors/traders.
Reading developing market activity, in context with past price
behavior, is a short-hand way to follow what smart money is doing. Smart money represents the controlling influences behind price
movement. We recently did an analysis on the German DAX, [Different Country, Different Culture. People Are People, Charts Are Charts,
http://bit.ly/ZDvxeg]. What held true for that analysis equally holds
true for the FTSE 100.
The starting point for any analysis is defining the trend and doing it on a higher time frame to put a market into a context for decision-making. The market sends out a lot of information, captured in the bar ranges and location of the closes on a bar. The size of the range indicates the level of strength/weakness of price movement. The close tells us who
won the battle for that session, whether it is monthly, weekly, daily, or intra day time frames.
Smart money does not like to let it be known what its intent is when in the market, but their hand can be detected by reading the developing
market activity and the volume behind the effort. Neither the FTSE nor the DAX provide volume, so an important element is eliminated. As with any market, you learn to deal with what is.
The 2007 high is obvious and important. After a labored rally since the
2009 lows, much of which was spent in a sideways movement for three years, there was a strong rally breakout in January, fourth bar from
the right. The last three bars are the focus of attention. We need to
determine if the market is absorbing seller efforts, or if the effort of
sellers is overcoming that of buyers. A look at the more detailed
weekly may provide that answer.
The trend has been up since 2009, already identified as relatively
labored, so we know that buyers have proven themselves, and the
onus for a change in trend is on the sellers. The character of the
weekly chart should also help in determining the quality of the trend.
Right away, it becomes apparent that the quality of the trend is not
strong. Price has moved sideways since the late January breakout. The message from the market also alerts us to a lack of demand bar at 1.
The very small size of the bar tells us there was a decided lack of
demand, demonstrated by the inability to extend the range higher.
Occurring at the high of the rally, and under monthly resistance, the
market is signaling a red flag warning.
Prior to bar 2, six of the previous 8 ranges had weak closes, yet more
factual information provided by the market that speaks to the
character, or quality of the trend. Contrast those bars with the one
labeled 2. It shows Ease of Downward Movement, [EDM], and a
low-end close. That one bar also erases the buying effort of the
February and March, a second red flag warning.
Where are the buyers? An apparent lack of demand is noted by and
invites sellers to step in and take over.
The possible negative tone set by the monthly was reinforced on the
weekly. We can expect to see clearer detail of the same on the daily,
and it does not disappoint. The lack-of-demand March high leads to a
correction, but it stops within the supporting trading range activity
from February. When price fails to rally to new highs, a lower swing
high is created. What follows that high is another warning message.
We see EDM, three wide ranges lower with weak closes, erasing the
past two months' entire buying activity. The ability of price to slice
through so quickly is the market telling us that the buying effort during February and March was of a poor quality. A new swing low follows the lower swing high, and by definition, the daily trend has turned down,
at least for now.
The next rally stops at 2, not quite confirmed, but Friday's lower high,
lower low, and lower close will likely lead to more selling on Monday.
The monthly and weekly time frames remain up, not strongly, but still
up. The lack of strength is attracting sellers to step in and take
control. Temporarily, that control has been wrested away on the daily
chart. There is still some support in the 6150 area, and how price
responds to it, should it be tested, will provide more important
For now, the demonstrated weakness is a sign of caution. One needs
to take an inventory of holdings to see if there are stocks even
weaker, and they should be either sold or have close stops to keep
risk exposure contained. The same would hold true for one's entire
portfolio. Profit-taking may ease potential erosion should the apparent
price weakness show no ability to attract more demand.
An analysis like this makes decision-making more pragmatic, using the
available factual information generated by the market, always the final
arbiter. The emotional element is removed and reduced to dollars and
cents, or pounds and sense. It appears that is what the smart money