Thursday 8 October 2009
Price rallied, once again, on Thursday to turn the intra day trend back up
and reaffirm the daily trend as up. Some may argue up, we say sideways.
There are too many things wrong with the many technical divergences
throughout this rally since March, and we cannot be acolytes to this Fed-
induced show. From early on, 3 August, mention was made in a previous
article, S & P - A "Muscled" Market, that discussed incongruity between the
rally and the character of the market. Again, on 14 September, when we
said to call a spade a Fed, S & P - Artificial Stimulation.
What is missing most in this rally? Supply and demand. For sure, there is
no supply coming into this rally, in general, and there is not a lot of demand, either. The POMO rally, as we like to call it, [Permanent Open Market Operations], where the Fed feeds funds to banks for the express purpose of supporting thestock market, accounts for the buying power going into demand. Beyond, that,there is very little other source for demand to drive price higher. Supply is absent simply because the Street knows what is going on and will not/cannot stand in the way of such deep pockets. Short-term
short sellers are getting punished, [the sins for trading against the trend],
but that is about it.
The first chart shows the swing highs since June, June being marked "A."
The next swing high, "B," ran for almost two months and gained about 170
points. The next, and current swing high, "C," lasted for less than a month
and gained about 100 points. The gains in time and price from "C" over "B"
are much less than the gains from "B" over "A." Clearly, the rally has
weakened in both time and price.
Also note how the August swing low was above the June swing high. This is
called bullish spacing and indicates overall market strength. See how the
swing low of 2 October is under the swing high of late August. There is no
bullish spacing. Price is not as strong is the message here.
Compare the last four days' volume on the current rally with the three
preceding days when price was declining. Volume is greater on the declines
than on the rallies, the exact opposite of a healthy up trend. Note how the
price ranges are smaller to the upside than on the decline where ease of movement to the downside, not what one would expect to see in a rally.
Thursday's high stopped at the retest high from 29 September, and the
price range was relatively small, notable because it occurred at a point of resistance. The next test is the high of the failed probe from 23 September
at the 1075 level. We expect it will hold.
On the second chart, you can see how beginning in September, price was
unable to reach the upper part of the trend line, barely staying half-way in
the channel, and then broke the support channel line very decisively on 1 October. Altogether, these pieces of market information suggest caution
as to the character and strength of the present tense market.
We are reminded of a similar price structure when the markets were rallying
in the latter part of 2007 to the final highs of the stock market in 2008, the
swings were getting smaller like in the first chart. There was bullish spacing
early in the rally, then there was none after the last rally in 2007. There was ample warning of market weakness ahead of the 2008 collapse, but no
warning as to the severity of the decline. This is not to suggest a huge drop
may be forthcoming, but only to show how market behavior repeats itself,
and the warnings should be heeded.
We are "heeding."