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S & P - Patience Required. Rally Running Its Course?

Thursday evening  18 November 2010

 A large decline on Tuesday, a pause on Wednesday, and then a
large rally on Thursday.   Usually, after a large decline, there is downside follow-through, but then again, having an IPO of GM's
stock offered on Thursday is not a usual occurrence.  Coincidence? 
We are of the mind that there are no accidents, especially when the
government has a stake in it, but we digress.

 Patience is required to get short this market, if a short position is
even warranted.  We gave a few objectives yesterday, and we stated the second important area of resistance would be the half-way
point of the November range, 1198, [See S & P - Getting Precariouser
And Precariouser
, second paragraph, click on http://bit.ly/aiKQCM]. 
You can see from the 60 minute chart below, price rallied to, but never
exceeded that area, [There was a brief high at 1199].

 The question we posed was, were the buyers absorbing the efforts
of the sellers in preparation for a move higher?  If there is to be another
rally, how high?  We address that in the second 60 minute chart.

 S&P 60m 18 Nov 10

 We drew two potential resistance areas.  The lower horizontal line
marks the high of a wide range bar to the downside, on increased
volume, and these high areas are often defended by sellers.  The
higher horizontal line is the last swing high from the 15th.  One or
the other could be important, or both can fail as price could rally
right past them.  We are of the mind that there is not a lot of demand left in the buyer's corner, but that is just an opinion, and opinions are
always subject to being wrong.

 One more point to mention here.  Yesterday, we were looking to get
short during Thursday's expected rally.  However, no short position
was taken or considered because of HOW the rally developed.  It was a strong rally day with very little in the way of an intra day correction.  In fact, we issued an intra day update after the first hour
of trade to make that point.  [See S & P - Intra Day Update, click on
http://bit.ly/9BT3kb].  Getting short was the plan, but the developing
market activity said to keep that plan on hold, and we did.

 S&P 60m2 18 Nov 10

 Are we being stubborn in wanting to be short this market?  Here, the
basis for that is one drawn from observable facts and not just an
opinion.  Counter trend corrections typically last from 1 to 3 days, and
on occasion, 4 or 5.  We have marked the number of days the market
corrected, since the low of August, and below that number, we added
how far the correction went in points.

 It is apparent that the first four corrections were between one and
three days, normal corrective activity in an up market.  The last
correction is quite different.  It lasted six days, and the decline was
54 points, twice the previous numbers in both time and price.  That
is a change of behavior in the market, and it came after new highs,
when the market is supposed to be exhibiting strength. 

 The larger correction tells us sellers were considerably stronger
than buyers.  Tuesday's low end close was the lowest in 18 trading
days, erasing the previous bullish effort, with ease.  This brings us
back to the question of how high can any rally continue, and why we
gave not much room?  Of course, we need to see weak market
behavior to confirm this, and if activity develops strongly instead,
then no short position will be warranted.

 We have a plan, it is in place, and we also have the necessary
rules to be followed before implementing the plan.  The close on
Friday, the end of the week, may be quite telling.  To the weekly
chart, next.

S&P D 18 Nov 10

 Prior to Thursday's rally, the weekly chart had a negative look to it,
with the possible close near the low end.  After Thursday's rally, that
changed, and it looks more favorable for the bulls.  If price declines,
the market will close on a weak note.  If the rally continues and holds,
price will close on a more positive note.  The weekly chart is important
because it is a higher time frame, and higher time frames are more
controlling.  We are going to use an intra day time frame to make a
point for what may happen by the close of Friday.

 On the 9th, we noted how volume increased sharply on the close of
a 60 minute chart, and where the  position of the close was.  [See
S & P - Tuesday Could Spell Trouble, click on bit,ly/dxnGOv,
explanation given after the first chart].  While the time frame is
smaller, the principle behind HOW and WHERE a market  closes when
there is such an increase in volume, is very important.  That is why the
position of the close on Friday will be key.

 Patience, patience.  The market does tell its story, but in its own time
and way.

S&P W 18 Nov 10