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S & P - A Slow Turn - It Takes Time To Reverse A Trend

Tuesday  29 September 2009

We are of the mind that the S & P is changing from  an up trend to at
least a sideways direction, in a transition to a renewal of the down trend. 
Market activity appears to be indicating such a change.

As a reminder, the high was on 17 September in both SPY and futures. 
A double top occurred in SPY on last Wednesday, the 23rd, whereas
the futures made a failed probe, which is a new high but a close back
under the previous close and high.  [See chart]

A probe is used to see what lies above the previous high.  Is there more
demand?  Are there resting stops overhead?  If there are, the probe
upward will uncover the new demand and trigger stops from short-covering
of weak hands.  If there is little of, or no demand, price will come right back, "failing" to sustain the lack of  new demand, so it declines based on a lack
of demand and some new selling.  This is what causes price to close low
end, as it did on the chart below.  Note that volume was highest on the 
failed probe, so it cleared out all the stops and trapped any new buyers.

Speaking of volume, we reiterate that the answer to the lack of supply
coming into the market, of late, has already been addressed by the volume
activity between the 9th and 17th of September.  You can see the flurry of
volume activity during that span.  It reflects smart money unloading their
longs under cover of the rally because it takes time to unload their line of
long positions.  Remember, smart money does not want the public to know
what they are doing, for obvious reasons, and they try to hide their activity
as best they can. 

Nice try.

The review is made to keep current market activity in a context of the ebb
and flow of movement for it is all related, or can be explained to relate in
a fluid context.  We recommended short positions at 1059, today, as price
rallied in early afternoon.  We viewed the rally as a failed attempt to retest
the previous high and the probe.  The day was narrow in range, an
indication that sellers are active sufficiently to keep what buyers remain
from taking price higher.  Also, the day went above yesterday's rally, BUT, 
similar to the described failed probe, the rally found no buyers willing to participate, and price began to sell off, gradually, going into the close. 
[Price was 1058.75 when we wrote this, the close was 1055]

See how on Friday and Monday price broke the established trendline
connecting the July and September lows?  It was only by a little bit, but it
is a minor sign of weakness when the market should be exhibiting nothing
but strength.  It does not signify a change in trend, so do not read anything
more into it.  It is what it is, but within the context of the market's "story" as
we are relating, these little pieces of the puzzle add up.

Will the market just drop from here? 

Not likely.  It needs to develop a further base from which to distribute.  We
see that process as having begun a few weeks ago, as described in volume activity, and if we are correct in reading the message of the market, a break
under 1035 can be very damaging, and it may be enough to say the up
trend has ended.  However, that has not yet happened, and new highs
remain a possibility, so as we have been following activity throughout, as a
guide, we will continue the same in moving forward, one day at a time. 

It could be we are early in getting short, but the location, 1059, limits the risk
exposure, and it gives an edge, something we recommend highly when
establishing a position.  Tomorrow, Wednesday, is the end of the 3rd
Quarter.  The Quarterly chart still looks positive.  The quarterly trend is down, important to know, but the 3rd Q bar just ended is a positive up bar.

We know what to look for in managing the current short position.  Future
market activity will add more clarity as it develops.  The trend may be
changing. 

Buyer beware!

Disclosure:  Short @ 1059  Futures
S & P 29 Sep 09