Monday 27 May 2013
There is a reason why the trend is the most important consideration when positioning in any market. The number of profitable shorts, as of last week, can still be counted on one hand, at least those who remain amongst the ranks of the devastated ones still trying to pick a top.
The most money is lost picking tops and bottoms, but top-pickers are
always at odds with that fact. Richard Dennis lost more money trying
to buy sugar under 5 cents than he did buying at higher prices on
previous occasions. He ranks as a poster child for money lost in
bottom-picking, and he was a highly regarded professional player.
No matter. Top-picking egos have been clamoring for a top over the
past several months. Like a stopped clock, one day they will be right.
We prefer to let the markets reveal their message and respond to it,
rather than front-run it.
What will be evident in viewing charts from over three time frames,
monthly, weekly, and daily, is that the trend is unequivocally up, and
that is a strong statement from the market.
Where many may have anticipated the possibility of a triple top, the
Fed-driven market sailed right through what would normally be
resistance. One has to remember that the anticipated resistance was
just potential, and it had to be confirmed by market activity showing
signs of weakness and reversal behavior. It never happened.
The failure of a triple top is a great example of why one should follow
the message from developing market activity and not front-run and get run over in the process. The channel shows that there is still room to
rally without being in an overbought condition. What may provide
valuable information will be the location of the close by the end of the
week. A strong close will mean continuation. A weak close could
signal a possible turn, but it takes time to turn a trend, so one does
not have to be the first one in.
The dashed portion of the channel represents future support and/or resistance, once the first three points are established, the two swing
lows in 2009 and 2011, forming the bottom support line, and a line
parallel to it using the swing high between those points, 2010.
What has many bears-in-waiting salivating is the weekly Outside Key
Reversal [OKR]. Just like one swallow does not a summer make, nor
does a single bar necessarily reverse a trend. It may lead to a trend
reversal, but further proof of confirming market activity is required.
What is interesting about the weekly chart is the location of current
price activity within the channel. It is not reaching the top of the
channel. The OKR is occurring at the mid-point of the channel,
generally a sign of a weakening trend. An important issue with that
observation is the fact that price also failed at a similar mid-point back in September of 2012 and was still able to keep the trend intact.
It is simply a piece of information of which to be aware.
An OKR also developed on the daily chart, last Wednesday, 3rd bar
from the right. The volume was exceptionally strong. Volume was also strong the next day, with a lower high, lower low, and lower close, but note the location of the close. It was at the upper end of the bar,
and that is the market telling us that despite the increased volume and effort to drive price lower, buyers were in control by the end of the
If an OKR at a [potential] high is a sign of weakness, more weakness
should follow. The exact opposite happened, as noted on Thursday.
This reflects the power of a trend and how it takes a lot of effort to
Friday's close showed a drop in volume, and that equates to a lack of
follow-through selling pressure. The upper end close shows buyers still in control. Unless and until weakness enters the picture, one has to
respect the trend. If long, one would want to be moving up stops on
all stock positions for protection, in case a turn does develop.
As for being short, it may be appropriate for individual stocks that
have been under-performing the current market rally, but there is no
reason for shorting the market at current levels. What can never be
known in advance is how future price activity will develop. The trend,
[and Fed effort], may not be over, and based upon how the market
has been up, up, and still up since September 2011, it is a message
not to be ignored.
If more weakness enters the market next week, or sometime soon
after, there will be ample time to take a short position when a turn in
trend says it makes sense, to then make dollars from that side of the market.
One interesting piece of factual information is the last two times the
S&P traded at an all-time new high and reversed downward to close
more than 1% below the high were at the March 2000 and October
2007 highs. Will the same hold true this time around? If it does, we
will see market weakness to substantiate it.
Let the market be your guide. It never disappoints, unless its message is disregarded.