edgetraderplus'  Instablog

Tuesday  5 January 2010

 Starting a new year... and the trend remains up...of sorts.  True, it is up,
but it continues to show signs of struggle.  The largest recent correction
occurred after the October swing high of 1093.75 when price hit 1021,
from which a support trendline is drawn from the mid-July low, extending
into the future.  It is apparent that price has respected that support
trendline in November and December.  However, there is an important
observation to be made.  While price is holding support, it is no longer
rallying to the upper channel, as it did in August, September, and October.

 The November high is about mid-way in the channel, while December's
rally high is not even pulling away from support.  This is a sign of a tired
trend.  The key word here is trend.  It is still up.  No matter how tired it may
appear, it continues to make higher highs.  The manner in which the highs
are being made is weak, but the trend has not turned down.  What we can
readily determine from that is there is no reason to go short, trying to catch
a turn.  A visual inspection of the chart shows that the number of profitable
shorts in the S&P, and other indexes, as well, can be counted on one hand. 

The lesson?  Knowledge of the trend is up, regardless of its current
condition.  Do not ignore it and try to pick a top.  Top picking is for novices
and egoists.  Their record for longevity is unimpressive.

Then, how to best take advantage of the ongoing developing price activity?

 When there is an existing channel, but price is unable to get back to the
other line of the channel, it is helpful to draw a line across the recent highs
to see how price reacts to the new line.  Remember, what is very useful to
know is HOW price reacts to a support or resistance area or trendline. 
If it reacts poorly, that is a message worth noting.  If it reacts strongly, we
know the area is being respected, and that, too, is important information.

 You can see we drew a new reverse trendline connecting the two highs
designated by the arrow marks. The dotted portion of the line represents
the extension into the future, and one can see that price is not able to
overcome the newer supply line.  In fact, price is right at the line as this is
being written.

 Price appeared to have a key reversal [KR] last Tuesday, 5th bar from
the right.  A KR is when there is a new high but a close lower than the
previous close, a sign of weakness and can often change the direction
of a trend, both on a minor level and on a primary level. 

 Thursday's 1200 tic decline and low end close, 3rd bar from the right, 
gave all appearances of the market going south, especially since the
character of the trend is so weak.  Undoubtedly, there were many who
saw this and decided to sell. 

 Now, we know the trend is up.  That is knowledge.  The odds of making
money going against the trend is small.  That, too, is knowledge.  Putting
that knowledge to use tells us not to go short against the trend.  For
anyone who did go against the trend, Monday's 1,800 tic rally was a rude
awakening, and a costly one.

 We will be among the first to acknowledge that the trend is weak and
almost begging for a change, but it has not changed, and that is the
bottom line.  There will be signs when the trend does change, and there
will be an opportunity to take advantage of those signs.  The market
never  fails to advertise its intent.  It is a matter of exercising patience and
heeding the message of present tense market activity as one's compass
for decision-making. 

 How does one minimize losses and risk exposure?

 Have rules, but more than that, follow them.  Rule number one: Knowledge
of the trend.

 The "Trend Is Your Friend" sounds so trite to so many.   We are guessing
that their market tuition bills, in the form of losses, is greater than they care
to admit.  The trend is knowledge.  Learn to use it wisely.

Monday  4 January 2010

 One thing a savvy trader must understand is that smart money, [our
descriptive adjective for controlling interests in a market], does not like
company.  What does that mean?  When a move, up or down, is about
to commence, it goes quickly giving little opportunity to join in, for smart
money is in control.

 Why does smart money behave this way?

 We are using the daily Crude Oil chart as a recent example.  There
was a sharp rally that began in September that was virtually uncorrected
from 67 to 83.  The reason is that smart money is going to punish shorts
in a rally, forcing them to pay up as price works higher.  Forced out shorts
become buyers that helps fuel the rally.  New buyers, those wanting to
establish a long position, do not get any pullbacks to buy at a "safer" price
level.  By the time new buyers realize they have missed the proverbial
boat, the weak-handed buyers start to jump in before they miss out entirely
on the move.

 Where do these weak-handed buyers decide to join in?

 Near the highs, exactly where smart money starts to take profits, maybe
even go short.  What happens to the last-in buyers?  Crude underwent a
correction from the mid-October highs to the mid-December lows, wearing
out most of the longs.  This kind of process repeats itself over and over in
most all markets.  In fact, it repeated again from the mid-December lows as
Crude OIl embarked on a current rally  from 71 to 81, a $10 move.  It was
dicey around the 74 level, but once price cleared the brief congestion,
price did not look back.  Every day was a higher low, higher high, and a
higher close.

 There were a few clues prior to the recent mark-up.  Note the sharp
volume spike on 9 December, when price broke the "Dubai" lows.  That
was followed by three lower low closes, but the downward progress has
slowed, considerably.  This clustering of closes and shortening of
directional movement are red flags, warning of a potential change. [See
Crude - Cruising On Cluster Closes]

 Price then moves into the congestion area between 71 and 75.  This
provided another clue, by virtue of the overlapping wide range bars
moving sideways.  This activity tells us there is a tug of war going on
between buyers and sellers.  Weak buyers had already been washed
out on the decline, and any remaining longs viewed this rally as an
opportunity to cut losses.  Shorts see price has broken under support,
and this rally is an opportunity to sell at higher prices.  Get the drift?

 How do we know that there is a concerted effort to affect price
movement this way, other than knowing it has been going on for over a
century in US markets?  Look at the way price is cutting through all of the
previous activity from October through November.  Normally, this kind of
trading range becomes an area of resistance, as buyers try to overcome
sellers for control.  Here, there is no resistance, smart money is totally in
control and dictates the movement of price direction.

If you draw a mental line across 78.00 on the chart, from October on, the
preponderance of price activity occurred above 78.00 for about seven
weeks.  On the far right, price has cut right through in just five trading
days.  When did the move begin in earnest?  The day before Christmas,
when many traders were on vacation, [including us], or not willing to take
a position over the holidays.

 Here is a classic example of how smart money never sleeps.  Holidays? 
Not for them.  Not when there is an opportunity to catch everyone
unawares.  Look at each rally.  Where would you decide to get in, and
where would you place a stop that did not entail thousands of dollars at
risk?  The irony of all this is that just jumping in is the "safest," and about
the only way to get in.

 We had been following and "reading" this market for a few months,
advocating from the long side, without taking a buy and hold, or riding
through the correction, but biding time to get long when it was opportune:
Crude Oil - To Rally Or Not To Rally? Why We Love Pictures!,
Crude Oil - A Message From The Market, and
Crude Oil - Trend Remains Intact are but a few example of how we had
been viewing Crude Oil from the long side, given present tense market
behavior.

 Take note of this kind of behavior for you will see it again and again. 
How to participate is the challenge!

Wednesday  30 December 2009

 Time to review in preparation for the new year.  We start with an annual
chart, without comment, asking the question, can anything be learned
from such a chart?  Few market participants ever look beyond a daily or
weekly chart, and even fewer ever view an annual one.  There is actually
a lot of information that can be gleaned from  yearly charts, and they help
put a market into a context...important for identifying trends and developing expectations.

 We drew in one simple little line that shows where price has stopped, but
that line is extrinsic to the rally.  What does this chart suggest to you, if
anything?

 
 Here are our observations.  Starting with that little horizontal line mentioned
above, it is a 50% retracement between the market high and low.  Mention
of this point has been made in the past.  A half-way retracement can often
act as resistance in a down market and support in an up market.  If price is
unable to rally above a half-way point, it indicates weakness, and the trend
should resume.  What is the trend here?

 Good question.

 Price made a lower swing low in 2008 and 2009, under the previous low
of 2002.  A lower swing low, following a failed retest high, turns the overall
trend down.  If the trend is identified as down, price stopping at the 50%
retracement level becomes a more significant piece of information.  Keep
in mind that 50% is an area, not an absolute price.  S & P could still go a
little higher, over the 50% area, but if it does so in a weak manner, the
market is providing an important message.

 Note is made of the key reversal high established in January of 2000. 
[A key reversal is a higher high, followed by a close under the previous bar,
in this instance.]   This one led to  two more years of a substantial decline,
establishing a low at S&P 767 in January 2003.

 There was a failed retest in January 2007.  [A theme of Januarys, it seems] 
Note how the close of that bar is in the middle, after making a slightly new
high.  [Jan 03 high = 1574, Jan 07 high = 1586].  This is a huge red flag.

 Why?

 Any time a market makes a marginal new high and closes mid-range on
the bar, it says that there were sellers present at the highs, otherwise, the
close would have been higher.  The inability to go much over the high of
four years earlier tells us that there was no new buying appetite or stops
to continue the price drive higher.  It was a shot across the bow for those
hoping to see a stronger stock market.

 There was no way to know to what extent the market might decline, but
there was advance warning that a decline was likely.  We often say how the
market is the best source of information, and it advertises its intent.  Here is
a great example.  It was clear in January 2003, and it was clear again in
January 2007.

 Ignore larger time frame charts at one's own peril.

 A quarterly chart provides more detail than does an annual.  The bar
approaching the same 50% retracement point is decidedly smaller.  The
reason why it is smaller is because selling efforts are meeting the efforts of
buyers and preventing the range from extending higher.  Interesting that a
smaller range just happens to occur at a 50% point.  As in life, there are no
accidents in the market.

 Volume has also declined, and this tells us that buyers are not that strong
in number...less of a following as price goes higher.  A red flag of its own.   
[A red flag is a warning to be alert for potential change.]

 The weekly chart fills in even more detail, as we go down in time frames. 
The six week cluster of closes indicates an inability of the market to sustain
a directional move.  This is occurring just under that 50% area identified on
the annual chart, carried forward.  Of significant importance is the added
observation of the increased volume during the last three weeks of the
clustering.  Volume is energy, effort.  There was very little reward produced
for the additional energy expended...another market message...another red
flag.  We addressed the importance of a diminishing effort in the market in
a previous article, S & P - Appearances Can Be Deceiving.

 In the last two weeks of the year, price has made new highs, but the effort
has been a tired one.  The market is letting us know, well in advance, that
the current advance is in trouble.  We have warned of such before:
S & P - Trading Ranges And Bubbles. 

 Warnings, red flags...they are signs to be aware of potential change.  The
"change," always remains "potential" until the time that confirming indications
take hold.  To date, there have not been any, but do not get lulled into
illusions of higher prices as a "sign of strength."  Always be aware of HOW
price has been going higher.

 Summation follows.

 The annual chart is closing at the highs.  This tells us to expect a higher
high over S & P 1128 in 2010. How much higher over 1128 is unknown? 
1130 would fulfill the expectation of a new high just as much as 1200, or
more.  The 50% area is just a guide, and for now, it is issuing warnings. 
We did not include a daily chart that would show more of the same, a
struggle as price limps higher. 

 What is missing from this scenario is the confirmation to validate the red
flags, and the only thing that will give substance to the warnings is supply...
supply in the form of strong selling, [increased volume] that makes a lower
swing low.  A move under S&P 1085 -1080 , made with increased volume
and wider  range bars will seal the deal.   There will be earlier signs, first
showing up on a 60 minute chart, translating to the daily, etc, but until they
happen, the struggle upwards will continue.

 Just like the key reversal and failed retest shown on the annual chart 
provided warnings for change, and  change did occur, we see no reason
for ignoring the current signs, and for sure, no reason to jump ahead of
them.  Patience will pay off.  The new year awaits.  So do we.