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Outstanding Example Of Reading A Market! The Analysis Is Market Specific In Application. The Application Is Universal For Any Market.

Monday  23 November 2009

"Speculation is as old as the hills.  Whatever happens in the market today
has happened before and will happen again."    


                                                    -Jesse Livermore, Speculator King

 

The following is an example of reading developing market activity that
captures the essence of the above quote by Jesse Livermore.  Markets
offer unlimited opportunities every day, and it rewards original ideas.  It is
somewhat ironic that any current technical analysis considered original is
really an event  that has already happened so many times in the past.

This analysis is of the current situation in Crude Oil futures, far removed
from the minds of many who dwell  only in other futures or only in the stock
market and cannot comprehend a connection between this  analysis and
any other market or specific stock(s).  Bear in mind that we know nothing
about the crude oil  market, not even the size of the contract.  What we see
is an opportunity in a market that happens to be  this one.  As you read the
analysis, forget about crude oil, even futures.  Instead, focus your attention
on the principles behind the analysis for this could just as well be your
favorite market of particular stock.

We have covered Crude Oil since its recent breakout in mid-October. 
Some of this material has already been presented, but this will be a
comprehensive analysis of how to read and interpret any market on any
organized exchange, stocks or futures.

Our first start in any market analysis is to identify the trend, for it is the path
of least resistance.  The objective for consistent and successful trading or
investing is to be in harmony with the prevailing trend of  the time frame in
which one is considering for a position.

To keep one's attention focused on the guiding principles and away from
any bias toward trading or just futures, most references will be aimed
directly to market activity because developing market activity applies
universally.

We previously described the price breakout to the upside,
Crude Oil - Picture Perfect Breakout, which presented an excellent buy
opportunity.  The first chart is unmarked so you can look at it and decide
what you see from whatever perspective,  experience, or ability you bring to
assessing a market opportunity, or seeing no opportunity and take a pass. 
So make your own judgment before proceeding.

Chart 1
CLF W 23 Nov 09

The next chart is a weekly to put the market into a context, similar to
identifying the trend, getting an overall perspective.  One can see that
price ran into resistance in June above the 71.00 level and again in
mid-August slightly higher, around the 75.00 area  If you look at price, it
appears to be in a trading range, moving sideways for five months.  We
can get a better idea of the character of this trading range by observing
volume, at the bottom of the chart.  When price corrected at the end of
June, volume declined.  This suggests a lessening of selling pressure.

Contrast that with volume for the month of July and first part of August as
price rallied.  Volume expanded along with the increase of price, and this
tells us that buyers are in the market, bidding price up.  The drop in volume
for the last two weeks of August says demand pulled back, and so did price,
digesting the gains.
 

We entered the analysis as price was breaking out,
Crude Oil - Major Breakout Potential, and have since been in and out on
rallies and breaks, for the record.  What is now the most pertinent aspect of
the charts is HOW market activity developed.  Notice how price closed on its
lows for four consecutive weeks.  When price closes on the low end of a bar,
it indicates that sellers are more dominant than buyers, [otherwise, the close
would have been higher.  Simple logic.].  One week could be sellers in
control.  Four weeks is a different story. 

What has been the result of four weeks of selling effort?

Price has held.  Strong hands, [aka smart money], is buying all the selling
without allowing sellers to take the market lower.  The reason for this is, if
the market were to go lower, it would weaken the technical structure of the
chart and invite more selling.  Easier to keep the market appearing weak
without letting it actually weakening.

Volume continues to support this, as well.  Note the strong increase in
volume the first two weeks of October when the breakout occurred.  It
showed that buyers were in control and increasing activity.  Yes, there are 
sellers on the other side of the market, but look at the results: higher
prices.  Volume has remained high during the trading range.  Again, it says
no matter how much selling there is, buyers are absorbing it, a transfer
from weak hands into strong hands.

Chart 2
CLF W2 23 Nov 09

A daily chart provides greater detail of what has been transpiring.  The first
chart is clean, to give you your own perspective. 

Chart 3
CLF D2 23 Nov 09
 

We have marked the salient features of what is important to us on the daily
chart.  The first point is the horizontal line drawn across the August high to
show where the breakout was confirmed.  We entered the market near 76,
on this chart.  Take a look at where the trading range has developed...right
on top of the previous trading range below the breakout.

A few points to make:  The June and August highs were resistance.  Once
price breaks through resistance, it then acts as support, and you can see
from the horizontal line, that is the case.  Next, whenever you see a trading
range develop on top of a previous trading range, it has bullish implications. 
Price is holding, and is likely to go higher. 

We have also drawn in two lines marking the swing high and the current
swing low.  Look at how price moved strongly from 66.00 to 82.50.  Price
covered 16.50 dollars in 18 trading days.  Since, price has traded for 22
days and has only been able to retrace close to 38% of the gain.  A sharp
rally followed by a labored correction.  This is an indication of strength. 

We have also drawn in a dotted line representing a 50% retracement. 
This is a general guide to determine the overall strength or weakness of a
market.  A strong bull market will hold 50% retracements; a weak bear
market will fail to get above 50% rallies.  Here, price is holding well above
the 50% level, and this clearly shows the character of the developing
market activity as one of strength.

The Friday closes have been denoted by small circles, taken from the
weekly chart.  The third one is important.  The day before was a wide
range bar down on a sharp increase in volume.  This could be sellers
about to rout the buyers.  Then the third week Friday bar gets printed. 
It is a small bar, under mid-range close and also closes under the entire
trading range.  This is a sign of weakness, or so it would  seem.  The fact
that there was no more downside follow-through after such a strong day
down the day before makes this bar suspect.  The relative smallness of
the range tells us buyers came in to stop the decline.

The importance of the bar shows that it was a failed probe lower to test
what kind of selling might develop under the trading range.  None, as it
turns out.  It did accomplish getting weak longs out on stops just under
the trading range, and it may have even invited to short sellers, but that
was it.  Confirmation of that observation comes from the rally on the
following day. 

Looking back, it becomes apparent that  the high volume sell-off was a
mini-selling climax where volume expanded and weak shorts exited as
strong hands were buying taking all offers.  This is another, subtler form
of strength when a market cannot break.

The remaining trading days end with this past Friday's retest of the failed
proved a week earlier.  The retest bar is similar to last Friday's low probe:
another small range, volume decreased, [an indication of no selling
pressure], but this time, the decline makes a higher low and a slightly better
close.

From all of the observable factors reviewed, the developing story, as told
purely by the market itself, though price and volume generated
information, is unfolding in a very positive fashion,  What the trading range
does is build a base from which price can engage in a sustained rally
higher, IF it is going to rally.

IF?

After such a compelling story there is an IF?!

We could always be wrong.  The probability remains favorable for the
conditions as described.  However, there is never any sure thing or
certainty in any market, no matter how convincing an analysis may be. 
What no one can know if how price will develop from this point forward. 
The market may continue in a trading range for several more weeks, a
distinct possibility.  If it does, and for as long as support holds, then the
case will still be made for higher prices.

All anyone can do is assess the situation and go with the market
momentum.  Any change will come about through NEW information which
we do not yet have.  One cannot trade or invest on what MIGHT be.  
Decisions have to have some basis in fact. We believe this one does.

Long positions were recommended on Monday.

Chart 4
CLF D 23 Nov 09