Sunday Evening 11 December 2011
Last time we commented on the S&P, we noted it was nearing potential resistance, 1208 - 1214 area. Here is what we said on 28 November:
"What may be key for this market is IF price can extend the
present rally into the potential zone of resistance, how far
into that zone, should the market continue up, and then,
note HOW price responds to it. If price cannot reach that
high, or acts poorly and immediately sells off, we will know
to expect lower prices, perhaps retesting the lower portion
of the August range."
If one detects a predisposition to resistance holding, that would be
correct. Price blew right through resistance, on strength. One of
the benefits of doing an analysis ahead of the event is knowing how
to handle decision-making. While it looked like a shorting opportunity
could be developing, at that time, the caveat was to "...note HOW
price responds to it." Price did the opposite of expectations, but
there was never any reason [demonstrated weakness] to enter a
short position. That is a lesson we have learned from experience,
and it is why the caution is ALWAYS to be observed: watch HOW
price responds to any expected support/resistance area, under any
circumstance, not just this one.
Market activity is always the final arbiter.
Let us start again with a monthly to see price has been and where it
might be going.
The purpose of starting with the longer term monthly chart is to see
what this larger controlling time frame is saying. Interestingly, the
markets have been in a broad trading range for over a decade, and
the current rally has not reached the upper resistance channel line.
Could that "statement" be important? A closer look at the latter half
of the decade+ may be helpful.
The decline to the lows of 2009 was important because price broke
the support channel, but only briefly, and we analyze the market from
that last low. The first rally reached A, followed by a correction to B.
The next rally went to C, and then another decline to D. We drew
connecting lines to the tops and bottoms of the swings. A trendline
was added, once the reaction low at B was determined to hold. Price
respected that trendline until August, when it was broken resoundingly
on a wide range bar down and on the largest volume in over two years.
That is market activity making a statement.
One might say the close was on the upper half of the range, and that
said buyers were present. We would agree, but with the stipulation
that those "buyers" may have been covering shorts, as opposed
to establishing new long positions. But let us back up to put the
previous activity into a context before delivering our conclusion.
What we want to do is determine the character of the recent market
in order to assess its strength or weakness. To do that, we make a
comparison between the market upswings and downswings. The
decline to B, correcting the rally to A, held above the 50% area of that
range from the 2009 low to the high at A. That piece of information
tells us that the market was relatively strong. In a strong market
environment, we also know corrections tend to last between one to
three bars The correction to B was three bars, another piece of
information supporting the first observation. From both, we could
expect the market to make new highs, which it did in the rally to C.
When the rally to C is compared to the rally to A, it is apparent that C
did not gain as much ground. It was weaker than A. That is the only
conclusion that can be made, and it is not enough to change the
bullish behavior from the 2009 low. Then comes the correction to
Comparing the correction D to that of B, we see it was stronger than
B, and it lasted five weeks, much longer than the first correction. This
starts to change the picture. We also note that the correction to D
exceeded the 50% of range of the rally from B to C.
What we are doing is reading market activity, the truest source of
market behavior, in order to assess the character of the recent move,
and the only conclusion to draw is that the market has weakened,
noticeably. That does not mean the recent uptrend has turned down,
but it does send up a strong red flag warning to temper expectations
for bullishness. It certainly is not a call to go short, either, lest
anyone jump to a hasty conclusion.
All we are doing is getting a read on the market from a larger time
frame, because it is more controlling on market forces. The breaking
of the trendline on a wide range down with strong volume cannot be
ignored. We also see the strong rebound rally in October, third bar
from the end, but the upside volume was much less than the August
downside volume, and price has not yet exceeded the August high,
now a resistance area.
What sayeth the daily chart?
This time frame, were one to ignore the weaker larger time frame,
seems more bullish. If one were to ignore the above analysis, it could
present a false sense of hope. Everyone sees the obvious resistance
just under 1300. While the decline to the November low went lower
than a 50% or range correction, keep in mind it is just a guide and not
an absolute point from which to act. The move lower was brief, and
price quickly recovered above that area, which brings us to the
From the November low to the recent December high, one has to say
that price has been holding pretty well, and way above a 50% of range
measure for relative strength. However, it is too soon to know HOW
the market will deal with the Thursday Outside Key Reversal, a new
high, a low under the previous bar, and in this instance a lower close,
and a poor one, at that.
It makes little sense to recommend buying at current levels because
there is resistance overheard, and money is not consistently made
buying just under potential resistance. The first monthly chart showed
a broad trading range. The second monthly chart showed a weakened,
but not ended, rally. After all is said and done, at this point, the safest place is on the sidelines. That may be to the consternation of those
who want to be in the market all the time, but there is a difference from being in the market all the time and being on the market for the right