Sunday Evening 12 December 2010
The technical read of the market says to expect higher prices this
week. However, the technicals are also at odds, and we can think of
only one reason. The Fed continues its politically unabashed motive
of keeping the market propped up, at least until year end. After all,
Wall Street has its bonuses at stake. The Fed and Wall Street is
another story, but their actions are reflected in ongoing market activity.
To the charts. We are including the weekly and daily S & P Midcap
stocks, for they, too, tell a story. The first obvious point to be made is
the potential double top, reached last week. Typically, the first time
price reaches a double top, it holds, but these are not typical markets,
so that is left as open.
The second, less obvious consideration is the amount of time between
the mid-2008 top and decline to the first Quarter in 2009, compared to
the recovery from that bottom to the mid 2010 initial high. We show
this by drawing in swing lines to capture the primary movement.
Last week's volume was the highest in several weeks, but the range
was small. The only way for a range to be contained on increased
volume is when sellers are meeting, and stopping, the efforts of
buyers. Technically, the week was a higher high, a higher low and
a higher close, but the range also stopped at the mid-2008 previous
top. Previous tops act as resistance in the future, and the future
since 2008 has become the present.
Technically, as just described, the market says we should see higher
prices. What is troublesome is the character of the bar, the contained
range on increased volume. We are not in the business of predicting,
so we will watch developing market activity to see how price responds
to current conditions.
The daily is not any more technically comforting than was the weekly.
Friday's bar closed on the highs, and from that, we can only adduce
higher prices for this week coming. What is of concern on the daily is
the five bars preceding Friday, and in particular, the previous three
with the highest positive volume since the end of September.
We see a cluster of closes that show very little net upside progress.
The effort of those three high volume bars produced no reward. Yet,
price did close higher on Friday, and what we are seeing is the Fed
intervention at work, not letting price decline.
The same has been true on the S&P. What this artificial propping
up of prices does is punish the bears, to be sure, but ultimately, it will
bring great harm to the bulls when the effort stops and price will turn
with a vengeance to offset the exaggerated highs, offsetting one
extreme move with another...but that is more of an editorial.
We see the same thing in the S&P: new highs, but accomplished by
a very small range, and even smaller volume. The smaller volume
here tells us there is a lack of demand, [effort], and what demand
there is is being met by sellers. The key here is that sellers have not
yet been able to take advantage of weakened demand. However
weak demand may be, we know that supply is even weaker. We also
know that any time supply volume increases, it can drive price lower.
This is not a confident bull move.
Here again, let us focus on the last two volume bars. Thursday's
volume produced a mid-range close, [second bar from the end].
A mid-range close tells us that buyers and sellers were in balance.
But wait! Why should there be balance between the two when price
is closing at the highest level in two years?! Shouldn't the buyers
be in total control?
Then on increased volume Friday, the range is almost half of
Thursday's. With the increased effort, which is what volume reflects,
why didn't buyers take price higher? Sellers are present, that is why.
Thursday's mid-range close looks like smart money is unloading their
positions on this rally, and the same can be said of Friday. Actually,
when the last six trading days are included, it helps to explain why
buyers are not extending price higher.
That said, the year is not yet over, and it looks like the Fed wants to
keep the market high. We have to trade what we see and not what
we think. What we see is an effort for price to work higher. We went
long Mar S&P at 1225 on Thursday, and sold half the position on
early intra day weakness, Friday. Stops are in place to make the
trade risk free, and if price is to work higher, the position will be more
profitable. That does not mean that we ignore the character of HOW
this market has developed.