Sunday 23 May 2010
Reading the market is not always an easy task, but being patient and
letting it declare itself, especially in what may appear to be times of
uncertainty, will pay off and prevent costly mistakes. What is going on
in the markets?! How can a 15 minute moment of fame 1,000 point drop
occur? What are its implications?
One of the appealing aspects of technical analysis is not being
concerned with the events that create developing activity. To us, any
news is a form of rumor which may or may not be true, and most often,
is intended to be misleading. Fortunately, this works, for this analyst is
incapable of interpreting the never ending feed and vast array of market
information pumped out on a daily basis. Price and volume produce a
much more reliable "story."
One line of thinking that addresses the 6 May debacle is that it was a
direct response to Goldman Sachs being publicly chastised by Congress
in its faux quest for accountability. The message to Congress was, "Watch
what we can do to the markets, at will, and see if you want to mess around
with us." This makes much more sense than the talking heads' explanation
of the "fat finger" triggering a bogus sale. Whether the dropping of a
gauntlet story by the Goldman Sachs ilk is true or not makes no difference.
The results are left on the chart.
How to gain a perspective is to put the results of developing activity in a
context that has meaning and can lead to a plan. The 6 May decline of
1,000 Dow points has many earmarks of a selling climax, but by definition,
it cannot be a selling climax. What is the definition?
A selling climax is the culmination of an existing trend that becomes
exaggerated in degree. If this were a selling climax, where was the down
trend that preceded it? A climax, buying or selling, stops the trend. There
was no trend to the downside, so it could not have been a selling climax.
As an aside, for those who may think this is too technical, you may be
missing the point of the logic that underscores the explanation. Markets do
follow a logical path, as they have for over 100 years, for there is nothing
new under the sunlight of market analysis from a chart perspective. When
there is an understanding of the process involved, it leads to being able to
harmonize with the developing forces that creates a lasting trend. Going
with the trend is like having the wind at one's back. To have the wind at
your back requires knowing which way the trend winds are blowing. It is
To understand 6 May's decline, it would be easier to see what preceded
it. One of the ways a trend can end is for one of the forces of supply or
demand to run out. There is no question that prior to 6 May, the market
trend was up. An inspection of the daily ranges shows there was a
persistent narrowing of the ranges, and there was an attendant declining
of volume. This tells us that demand was weak, and weak demand is a
signal to the forces of supply,waiting in the wings to come in and take over.
You can also see that when there were sell-offs, both the ranges and the
volume were greater on the downside, and that tells us selling is stronger
than buying. Eventually, selling overcame buying, and lower prices were
the result. If there is a market truism about surprises, it is that they tend to
happen in the direction of the trend. 6 May was a surprise. The weak
sell-off from last week was also a surprise in its lack of sustaining any kind of respite rally before making new lows, exceeding the one of 6 May.
We had already called the trend down, from 3 May, days before the huge
market drop. [see S & P - May You Live In Interesting Times], and for the
first time, mentioned a target of the February lows of 1040. At the time, we
had no clue as to how the down trend would unfold. No one did, or could
know. The future had not yet happened, so the rapidity of the decline was
a surprise, and what was the trend in line with the direction of that surprise?
Need we say down?
What is another benefit of knowing the trend? Not getting caught on the
wrong side of market momentum. While we were able to capture a small
portion of the decline, at no time did we suffer a loss as a result of being
on the wrong side of the trend. We digress.
What the events of 6 May and the additional strong, unabated sell-off from
last week tells us is that this is the resumption of the greater bear market
down trend, and the counter market rally since March 2009 is history.
This tells us to look for important resistance points and to use them as
opportunities to establish a short position. Or so it would seem.
There is a caveat here. Markets spend more time in trading ranges than
they do trending directionally. It is possible, maybe even likely, that the
markets can engage in a protracted trading range for many months ahead.
We can never know that until after the fact, just as knowing a trend has
ended is an after-the-fact confirmation of knowledge.
The market may undergo some reflexive rallying after last week's lows.
Let us deal with some facts of logic. We know the trend. We can identify
resistance areas, 1113 - 1124, initially. We know what a weak rally to sell
looks like: smaller ranges and decreasing volume. Now all we have to do
is wait for the market to show its hand in developing market activity, and
This is one perspective, and a plan.