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S & P - Out Of The Shorting Gate, Or Another False Start?

Thursday Evening  3 December 2009

Usually, a small range at a high is a warning signal.  In fact, we coincidently
addressed just that in the article on Silver, Silver - Lining May Be Fading,
discussing the daily chart.  Yesterday's small range high, and under
mid-range close of the bar showed sellers won the battle that day.  Volume
was light, once again, reflecting more of a lack of demand than anything else. 
Still, when any market exhibits signs of weakness, it is an invitation for sellers
to come in and take advantage.  Wednesday was also a failed breakout to
the upside, giving more reason for sellers to take note.

Today.  Today price made a new high for the rally, but one that was
short-lived and failed.  Price began to drift lower, and it stayed range-bound
throughout the trading day.   It looked like it could be yet another non-event,
but during the last hour of trade, the momentum for price to go lower gained
speed, and a little more volume.  This produced what is called an Outside
Key Reversal [OKR] day when price makes a higher high, lower low, and in
this case, a lower close relative to the previous day.

An OKR is usually a significant event, one that can turn a trend, and it is a
technical sign familiar to even nascent traders, so the whole world can see
what transpired today.  There should be some downside follow-through on
Friday.  We say "should," but the market can do anything.  If there is more
downside tomorrow, this could be the beginning of a correction, at a
minimum.  One indication of how weak or not so weak this potential sell-off
may be is how price responds to the 1092 area, a minor support from an
intra day trendline.  If that holds, this potential decline will go nowhere.

We could try to impress readers by saying, "This move can go the 1068
area, even to 1025!"  But first, it has to break 1092.  Like we have said
before, to make rabbit stew, first you have to catch the rabbit.  Short
positions were taken on the close when the lower closing price confirmed
the breaking of the 1102 support, and also created the OKR day.  We do
not know how far price will decline from here, or even if it will decline at all. 
All we can do is follow the market activity and act accordingly.

"Anything can happen" are words one should be aware of every trading
day.  In the S&P market, given the ongoing support of Federal intervention
to prop up this market, the decline on Thursday could also turn into a
shakeout.

What is a shakeout?

It is a large price move, up or down, that recovers lost ground quickly.  If
there is no follow-through on Friday, and if price rallies back throughout
the day, this will have turned into a shakeout, and it will be yet another
false start, of the many since August, that can spell a correction, or even a
turnaround.  What this potential has going for it is the age and character of
the present trend.  It is a tired one, and one that keeps getting shorter and
shorter in rallies.  All that is lacking is supply.

What is supply v selling?

There can be selling in a market every day, as a matter of course, without
there being any supply.  When volume increases, and previous support
points start to give way and do not recover, THAT is supply.  It is a different
kind of selling activity, one that has bite and turns trends, as well as
continues them once underway.  As of the close, while the highest volume
occurred on the decline, it is too soon to know if the selling was a form of
supply, and that we will not know until tomorrow when everyone see how
price acts for the end of the week.

Support of 1102 was broken, but it is considered minor support, just like
1092 is.  The primary support is at the bottom of this three-week trading
range, the 1025 area, but there are layers of support in between to watch
along the way.

Short, the S&P.

[If anyone still has stocks that are not performing well, while the markets
have been making highs, time to jettison them before they get worse.  The
warning signs discussed here is also an indication to start taking profits in
stocks held, and/or move up protective stops to preserve any existing gains.]

S&P D 3 Dec 09