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S & P - Let The Market Lead One Last Gasp?

 Saturday  24 September 2011

 Letting the market show its hand, as it were, and then following its
lead is much akin to knowing and then following the trend.  In a
world filled with political/economical deception from all governments
doing anything and everything to cover up the mess they created
and continues to worsen, it is the clarion call of the market's surest
message, evidenced through price and volume, that will keep one
in closest harmony with results and least confused by false or
misleading information.  We are strong advocates of the market
being the best and most reliable source for knowing just what is
going on. 

 There are times when the picture is not always clear, but that,
too, is a message from the market to not press the issue until
clarity  cannot be denied.  We have purposely stayed away from
this market for the past several weeks because  rallies on declining
volume cannot be trusted, and since the sharp decline in early
August, the rallies and breaks have been V-shaped in a broad
trading range.

 From our perspective, the market may be on the verge of a further
decline.  For the moment, as of Friday, a potential rally.  As stated
from the outset, we are opting to let the market tell us its intent,
and then seek to get an edge for entry.  One thing is certain: no one
has a clue as to how the future [market] will unfold.  However, by
putting the market into a context, there can be expectations as to
HOW the market will unfold, and in the process, it confirms its intent.

 Translation?  The potential decline mentioned has yet to be
confirmed, and the potential for a rally needs to be assessed as to
its character as a clue for what is likely to follow.  If the rally is weak
with small ranges, declining volume, poor closes, a break of current
support around the 1100 area is sure to follow.

 If a rally does continue, if the ranges are wider with increased
volume, along with strong closes, then we can retest higher.  How
high will depend upon the quality and strength of the rally.  Now,
by admitting we have no clue, [nor does anyone else], how the
market unfold in the days and weeks ahead, we can say, it does
not matter.  All we have to do is watch for clues, generated by
market activity, and we will KNOW how to respond.

 You can see from the weekly chart where price decisively broke
an 8 month trading range low at the 1256 area.  The drop was
straight and fast, and it culminated in a selling climax which led to
a sharp rally off the bottom.  From there, the market swings have
been V-shaped, hard to follow for lack of an identifiable trend.

 We show 1137 as a target IF support around the 1100+ area is
broken.  Let us take this one time frame at a time to see if we can
learn whatever message the market is sending.  What we know
from the weekly, in addition to the break of support, is that since,
price has failed to rally back to the breaking  of that support,
around 1256.  That is an indication of weakness on a retest effort,
and part of the market's message.  The 1256 area is about where
a half-way retracement is.  The importance of using this is as a
guide.  If price cannot rally past the 50% retracement level, it is
another sign of weakness.

 Already, we are learning a few things about what could happen next.

 S&P W 24 Sep 11

 We show the daily chart for more detail.  A look at Thursday's sell-off,
second bar from the end, and the sharply higher volume behind it tells
us that supply/sellers were dominating...or so it seems.  The close was
off the low, about one-third off the bottom, and that tells us with all
the heavy volume, there had to be buyers present, otherwise, the
closing price would have been much lower, and, this all took place at
a level of support.  Also, notice the Friday close: it was near the high
end of the bar, and that tells us buyers won the battle that day and at
a level where sellers are supposed to be in control.

 The message is a bit mixed, but with a negative background.  It is a
near term red flag that alerts us to the potential of yet another strong
rally, or perhaps one last gasp that can lead to lower levels.  This is
where we now have to watch the character of HOW the market reacts
from obvious support.  Obvious because the whole world can see it. 
It is the REACTION to support that will provide the next piece of the
developing puzzle.

 S&P D 24 Sep 11

 The following intra day chart, a 65 minute chart, goes back to the
selling climax low, and it shows the first retest of that low, a few
trading days later.  There was a second retest of the low on the
19th, and it held just above the 1100 area.  You can see the
V-shaped rallies/breaks since then, and now price made a third
retest of the 1100 area support.

 What we know about support/resistance is that the more times
they are retested, the weaker they become.  In the current
instance, sellers are absorbing the efforts of buyers on each
retest.  However, just because last week was a third retest does
not mean one should go short, anticipating a support to give way. 
That would be getting ahead of the market and not following it.

 A closer look at the intra day chart shows why.

 S&P 60m 1 24 Sep 11

 The general context of the market is negative, but we see, after
the sharp, relentless sell-off on Thursday, that day's close showed
evidence of buyers near the low, and a follow-through rally was
expected on Friday.  Note the last wide-range bar on Thursday with
the high green volume bar at the end of the day session of trade.

What happened on Friday was a lower low first, and then an intra
day rally followed.  Once again, we can see the market sending
more messages.  There was a failed probe lower.  From that, we
learn that Thursday's late day rally was short-covering.  It is were
new buying, that support would have held, and a new low would
not have followed. 

 The sell-off on Friday was the market's way of determining whether
any new sellers and stops were still under the Thursday low.  The
fact that the probe lower was brief and a rally followed tells us that
selling has been exhausted, at least for now.  It is the market saying
not to be short or selling at such an obvious support level.

 What becomes important now it to watch HOW any rally may
develop, if there is any rally at all, for as we write this on Saturday,
we do not know if the rally will continue, nor do we have to know. 
There are two key pieces of information provided from recent
developed market activity that will give us important clues about
what to expect next.

 The first important bit of information is the identified starting point
of when price accelerated to the downside when recent support
gave way just above 1180.  Note the sharp increase in volume that
says supply entered the market and overwhelmed the buyers,
routing them, in fact.  Count on the 1180-1190 area as strong
resistance, so says the market.  More clues from the past to assist
in moving forward.

 The second piece of market information is the identified half-way
retracement, around the 1158 area.  If you look to the left, at the
bottom of the bar that began the acceleration down, see how the
response was so weak, and note where it was...at what turns out
to be the 50% retracement area.  There is a lot of symmetry in the
markets.  These points are good to know, when you find them.

 Here is precisely why we do not need to know what the market
is going to do next.  What we WANT to know is HOW the market
unfolds going into these areas identified as support/resistance,
because it is the HOW that tells us which way to be positioned
AT support/resistance.  Let us add, as an aside,  that we have
another potential resistance area at the 1147 - 1148 level from
using a proprietary measuring technique.

 HOW price develops in the days/weeks ahead will be very revealing. 
If the daily ranges are small, the closes not strong, and volume tepid
AND price cannot overcome the identified resistance areas, THEN
we know how to find a trigger to get short, especially by observing
activity right at anticipated levels of resistance.  On the other hand,
if the ranges are wide, strong closes and increased volume, and
price goes right through resistance, THEN we know buyers are in
control and to look for a weak decline in order to be a buyer at
support.

 Let the market lead.  Know the important areas and HOW the
market gets there, then follow.  It is so much easier than having to
guess and take bigger risks.  Sounds like a plan.

 It is.

 

S&P 60m 2 24 Sep 11