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S & P - A Change Of Trend - Not Down From Up, But Sideways, For Now

Monday Evening 2 November 2009

Price activity last week was the weakest since the March madness rally
began, both in terms of time and price.  The range was the largest decline
down, the close was low end, and volume increased to the highest level in
months, all signs of sellers stepping in and taking control from the buyers. 
The stage was set from the weak high, pointing to the small ranges of the
previous two bars from the end, and the second bar in particular.  Price
made a new high for the rally, but the range was small.  This one little bar
is replete with a message from the market. 

We can see from it that buyers were spent, unable to extend the range
higher.  The close was under the opening, and it was lower than the
previous week's close.  Plus, you can see that volume picked up, at the
same time.  The pickup in volume tells us that sellers were stronger in
activity than buyers, and this is proven by the lower close.  Sellers won the
battle of the bar, but this specific bar occurred at new highs where buyers
are supposed to be in control.  Market activity told us otherwise.  The stage
was set from the second and third bars that led to last week's substantial
sell-off.

 A trendline has been drawn up from the March/July lows, and that is where
price held on the decline.  Knolwedge of the trend is the most important
piece of market information you can have.  The weekly trend is up, so price
should hold at expected support, and it did.  BUT, the trend has been
weakened for reasons just described.  The volume increase on a large price
decline suggests the trendline may soon give way.

 S&P W 2 Nov 09

The daily chart gives greater detail.  Price closed under the trend line
[Friday, second bar from the end], the same line shown on the weekly
chart.  [Contract changes since March accounts for the difference in
where price closed on the different time frames, one above, one below]. 
The intra day activity is not shown here, but volume activity late on Friday
was unusually high for the time of day, and that in itself is a message not
to be ignored.  The increased volume occurred as price came cascading
down with impunity.  Buyers were unable to stop the onslaught.  Here is
where knowing the trend of the various time frames is so important.  We
saw that volume as a potential mini-selling climax that might stop the decline.

Why?

If the weekly trend is up, support should hold...and it did.  It may be in the
tenth round and floundering on the ropes of support, but the trend is still
up in the larger time frame.  That tells us not to press too hard on the
smaller daily time frame because it conflicts with a larger, controlling trend. 
Combine that with the mini-selling climax, and a possible reflex rally may
occur.  There is more that can be added to the mix.

On 1 October, there was also a relatively large sell-off.  On the intra day
chart, [not shown] the last 60 min bar closed  mid-range on increased
volume.  That says there were buyers at the lows...as well there should be. 
Why?  Because at that point in time, the daily trend was up.  Next day,
2 October, price gapped open lower, but the first 60 min bar rallied and
closed high end, [a show of strength] and a trading range developed for
the remainder of the day.  There was no more downside follow-through. 
Next trading day, Monday 5 October, price opened unchanged and
proceeded to rally above the little trading range and did not look back for
over 80 S&P points.  Knowledge of the trend is vital!

Guess where Monday's decline stopped?  Right at the little trading range
from 30 days earlier.   The market showed support back then, and because
of the weekly trend and support trendline, it showed support once again,
despite the more negative daily activity. 

The potential mini-selling climax was confirmed by Monday's lower open
and rally to close near the high end for the day, AND above the large
volume selling from Friday's close.  There was little reward for all the selling
effort after such a steep decline.  That observation calls for caution.

As an aside, the reason for calling for a change in the daily trend as no
longer being up can readily be seen in the volume activity for the first two
weeks of October.  It went down as price went up.  Volume being the
energy behind a move, there was very little energy!  Contrast that with
volume activity for the second half of October as price declined.  Volume
increased.  Sellers recognized the weak top at the high, and they became
more aggressive in noting the inability of buyers to retain control.  The
market messages are always there.  Sometimes they are not always
obvious, but they are always there.

We drew a dotted horizontal line extending into the future to represent
where  a retest rally may encounter resistance.  It starts around the 1056
area and extends to the 1062+.  Where will price hold?  We do not know
for the future has not yet happened, nor do we need to predict.  We can
draw some obvious inferences from the gathered facts to see where price
MIGHT stop on a rally.  We will know better as present tense market activity
develops, and both price ranges and volume will tell us if a rally is weak or
not.  The market always advertises its message.

Because the daily trend is no longer up, and the intra day trends are down,
no long positions will be taken.  [Rule: Never go against the trend in the time
frame you are trading].  Instead, we will wait for some indication to go short
on weakness.

The market never disappoints, if you are patient.

S&P D 2 Nov 09