edgetraderplus'  Instablog

Thursday  28 January 2010

 Price finally found some initial support to stem the steep sell-off from
the 1147 highs.  The trading range lows from November-December,
1078 area, stopped price at 1078.50 in response to the FOMC
announcement.  The horizontal support line that shows the previous
two month's support was extended into the future, the broken line
portion, and it shows the value of knowing where these areas are
once approached again.

 The validity of that past support holding was demonstrated by the
high end close of yesterday's bar and confirmed by the pick-up in
volume.  It was most likely short-covering after the 50 point decline. 
We often state that what is important is HOW a market responds to
anticipated support/resistance points, and the ability to rally from the
support low to close at new highs for the day addresses the HOW in
a relatively strong way.  It is worth noting that the close was higher
than the previous three trading day closes, adding to the possibility
of a reaction rally.

 We indicated the 50% retracement area, around 1112.  Depending
on how close any rally comes to, or exceeds, the 50% mark will
indicate how strong or weak the market is.  To demonstrate how to
gauge the potential importance of this area, [we did not draw any
lines],  look to the left of the 50% line, and it is apparent that there
was support at 1110 on the 31 December low, and that was a retest
of the trading range highs throughout November and December. 
This makes the 50% retracement an area, not an absolute price,
from which the market will provide important information in HOW
price responds up there.  Remember, it is not the price level that 
matters, it is HOW price responds to it that reveals any significance
to it.

 There is a minor resistance point at 1103.  That was the reaction
rally high, fourth bar from the right.  It could mark the potential of
starting a trading range, or it may be ignored.  We cannot know this
ahead of time, so it is just something of which to be aware, just in case.

 Putting the market into a context provides us to develop a trading
strategy. Right now, with the marked increased in volume as price
declined from the highs, it looks like a trend change and prompting
reason to sell weak rallies.  This makes HOW price rallies into the
50% resistance area...smaller bars and less volume...valuable
market feedback for establishing short positions.

 It is always possible that the market may retest Wednesday's lows
before continuing an anticipated reaction rally.  Present tense
market activity will have to be watched to see how a sell strategy
can be implemented.