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Michael Noonan Edge Trader Plus Michael Noonan is the driving force behind Edge Trader Plus. He has been in the futures business for 30 years, functioning primarily in an individual capacity. He was the research analyst for the largest investment banker in the South, at one time, and he... More
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  • Smart Money Does Not Like Company - Nor Does Smart Money Ever Sleep

    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!

    CLG D 4 Jan 10

    Tags: SPY, Indices, Energies
    Jan 04 3:44 PM | Link | Comment!
  • S & P - Looking Back To See Forward - Markets Are Mostly Logical
      

    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?

     S&P A1 30 Dec 09
     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.

     

    S&P A 30 Dec 09

     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.]

     S&P Q 30 Dec 09

     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.

    S&P W 30 Dec 09

     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.

    Tags: SPY, S P, QQQQ, Indices
    Dec 30 11:25 AM | Link | Comment!
  • S & P - Never-ending Trading Range? Act, But Beware Of Complacency


    Monday Evening 21 December 2009

     As Yogi Berra would say, "It's deja vu all over, again."  The trading range
    continues, as we figured it will, at least for December, but...anything can
    happen.  Those last three words are probably second in importance to
    knowing the trend.  "Anything can happen," usually happens when least
    expected, and very often when it does, it happens with a vengeance.

     Today's chart is an intra day 60 minute one.  For our purposes, we use
    day session only price data, and it suffices.   The current trading range
    has been in progress for over a month.  Each time at the highs, buyers
    have carte blanche opportunities to run away to the upside with this market. 
    Each time, it just does not happen.  There is not enough demand buying to
    break the stalemate.  We discussed supply selling in
    S & P - Trading Ranges And Bubbles, 6th paragraph.  Demand buying is
    the opposite.

     Demand buying is noted when there is a wider, or series of wider trading
    ranges, on substantially increased volume, and price breaks out of a
    previous resistance area.  This is differentiated from regular buying activity
    that occurs every day in normal activity.  Demand buying is also different
    from short-covering, also a different kind of buying activity.   Each have their
    own characteristics and place in various chart scenarios.

     If you were to gauge the heaviest volume activity of the last several trading
    days, today's was almost average, a shade under.  Look at where it
    occurred: at the top of the trading range.  What this tells us is that there was
    a lack of demand buying.  How do we know this?  Price did not extend itself
    up and beyond the resistance high of the trading range.  Demand activity
    would have shown the heaviest volume and wide ranges extending higher.

     Trading ranges are different animals.  They require the opposite of normal
    trading, which is to buy on strength and sell on weakness.  In a trading
    range, one has to sell apparent strength and buy apparent weakness. 
    Today, we sold apparent strength, primarily because resistance keeps
    containing and repelling rallies, and for the lack of demand, as discussed.

     There is another reason.  In a defined trading range, as this one clearly is,
    one of the least risky areas to sell is the upper 25% of the range, just as
    one of the least risky areas to buy is the lower 25% of the range.  We have
    identified the upper 25% on the chart, between 1105 and 1115.  We sold
    1108 late in day when price closed under the day's trading range, second
    bar from the end, on increased volume.

     The close was under the five previous 60 min bar closes, and the fact that
    volume increased tells us that sellers were more active that buyers, based
    on results of the poor close.  If you note the 5th bar from the end, it was a
    probe to go higher, but there was no volume effort behind it.  There is an
    example of mere buying activity as opposed to demand buying.

     We can be wrong on this, and demand buying can rush in tomorrow, but
    we have to go on what we know, and what we know is that price failed to go
    higher on weak demand in the upper 25% of a defined trading range.  If we
    are wrong, we will be wrong for the right reasons.

     There are a few other caveats attendant with this trade.  Price remained
    in the upper range of the entire day without selling off, despite increased
    volume on what selling there was.  The other one is the age of this trading
    range.  The further along the right hand side of a developing trading range,
    the closer it is to a final resolution.  Trading ranges try the patience of most
    traders, waiting for a directional move to get underway.   We have
    characterized this development more as distribution, rather than
    accumulation. The latter would lead to an upside breakout, but demand has
    been absent.  With a lack of demand, the only thing keeping price up is an
    even greater lack of supply selling.  If any amount of supply selling on
    increased volume entered the picture, price would fall hard.  For now, we
    deal with what is.

     What is, for now, are the high end of the trading range, resistance, and the
    lower end, support around 1080 - 1085.  Until broken, we get to use them
    as a trading guide, much as we identified a channel in the British Pound,
    yesterday, British Pound - How To Cover A Short Position In ANY Market
    Starting with the 9th paragraph, we discussed how channel lines can act as
    a guide, but it depends on HOW price approaches and REACTS to them. 

     In the S&P, price approached the upper resistance line in a WEAK
    manner.  The REACTION yet remains to be seen.  We draw this comparison
    to show how the tools of trading, using price and volume activity, are the
    same no matter how varied the circumstances.  The markets always adhere
    to the unchanging principles of supply v demand.

     We know for certain that price is on a trading range.  We also know for
    certain HOW it was just retested.  We also know for certain that trade
    location is very good.  Now we get to await the uncertain results.

    SPH 60m 21 Dec 09

    Tags: SPY, QQQQ, Indices
    Dec 21 8:50 PM | Link | Comment!
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