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S & P - A Tired, Spent Bull? The Market Will Let Us Know.

Tuesday  10 November 2009

What is missing in the S & P to indicate that a correction will ensue? 
Sellers, plain and simple.  There has not been a concerted effort of
selling to overtake buying activity and turn the trend down, at least
not in the past month or so.   23 September looked like a potential
high, and it lasted until 12 October.  That high then became a point
of resistance. 

New highs occurred in mid-October, but price moved sideways in a
trading range as opposed to rallying higher.  The October highs also
became a point of resistance, both of which are shown on the chart below. 
The question posed is, will the resistance points hold?  Will price turn
around and start going down?  Or will new highs be in the cards?

No one can say with certainty what will happen, but we can look at a few
signs and begin to draw some conclusions as to expectations and be
prepared to act accordingly.

 

 S&P D1 10 Nov 09

 

It is obvious that the initial resistance from 23 September gave way readily
when price rallied with a wide range bar and high end close on Monday. 
Volume was not that strong, but in an environment where buyers are in
control, price can rally on less volume. What it demonstrates is a lack of
sellers.  The lack of volume does indicate that buyers are less in number,
but not in strength of moving price directionally.  That brings us to today's
activity, and to the crux of questions posed as to what will happen,
price-wise?

What stands out immediately, [when you know what to look for], is the very
narrow range for Tuesday's activity.  It is the narrowest range bar since 10
August, and it tell us that sellers were present to keep buyers from
extending the rally higher, right at an important point of obvious resistance. 
However, price closed on the high, and that says that buyers remained in
control.  If sellers were in control, the close would have been on the lower
end of the price range. 

What is known is that sellers had a superb opportunity to wrest control from
weakened buyers, but as weak as the buying was, it was greater than the
selling efforts.  The edge  goes to buyers, even if only by default.  What is
difficult to answer is, why sellers have not taken over? 

The selling waves have been greater and stronger than the buying waves. 
The way we know this is through the pick-up in volume, which is shown on
the next chart.  It is quite obvious that volume was much greater on the
decline that on the recent rally.  Look back to the decline at the end of
September, and it is also apparent that volume was greater on the down
days than the rally days.  These are the few signs, observable facts, that
help draw some conclusions.

It can also be observed that the rallies of the past two months have made
the least amount of upside progress, and that says the energy behind the
rally has weakened.  It does not mean the rally has ended, just that it is
weaker.  Couple that with the other factual observations, and the stage is
set for a potential change in trend.  Of course, new buying on strong
volume could enter the picture tomorrow and change everything, but until
is does, we have to base the observations on what is, or has been.

Tuesday's small range is a red flag, a warning that sellers could step in
and take over.  If it is to happen, it has to happen now!  Our guess is that
it will not for sellers had every advantage going their way after the second
hour or trading, but it was lost.  They were simply not able to do anything,
and the strength of the market direction continued up from a lack of sellers.

What makes the most sense, given the weakened condition of buyers, is for
the market to make a new probe higher to see what kind of buying potential
exists above the October highs.  At the same time, the new high will clean
out weak shorts with stops resting just above.  If no demand shows up to
continue price higher with a wide range and strong volume, sellers will see
the failure of buying power, and that may be enough to bring them out in
force and start to overwhelm the buyers.  That would be a form of ending
action that is needed to turn the tide.  The alternative was given already. 
New demand would enter on a sharp rally and on strong volume.  

 The most logical possibilities are no known, and it becomes a simple matter
of being prepared to act on whichever one develops.  Market activity will
clarify the picture.  It always does, eventually.

S&P D2 10 Nov 09