Saturday 19 December 2009
For as much as it looked like the S&P was heading lower, it refuses to
give up the protection of the current trading range. The short positions
we recommended were scratched. After two days of effort, they were not
showing any profit due to the poor trade location, which happened to be
in the middle of the month long range.
The review of six different time frames,
S & P - A Domino Effect In The Making?, was helpful to keep in mind that
the higher time frames are still showing strength, and not to let the smaller
time frames, like the daily and intra day be too controlling for decision-
making as to immediate expectations for trend movement.
The horizontal lines frame the current trading range that started in
November. The up-sloping trendline shows how the trend continues to
remain above it. We have already covered how the upward thrusts have
been getting shorter, a sign of weakening,
S & P - Appearances Can Be Deceiving. It remains more of the same.
What we know for certain is that it will not remain the same, and when a
change occurs, it will auger a substantial move.
Let us qualify that conclusion. If price breaks out to the upside, we are
not of the mind that a move higher can/will be sustained. The Federal
Reserve is bankrupting itself; it already did so to the country back in 1933.
Even if it choses to continue pumping fiat paper into the market, more and
more people are willing to recognize that the "emperor is wearing no
clothes." We see the upside as limited, and we fully expect the possibility
of yet another failed upside probe if price does rally once again.
What we do see is the higher probability of a 100 point S&P decline,
nearer to the 1007 level. That target will be adjusted if and as price drops.
A point and figure calculation defines how low price can potentially go from
What has been missing in this market is supply selling. We have defined
supply selling before. It is when price declines with ease of movement down,
evidenced by wider bars on substantially increased volume, and previous
support areas are violated. We differentiate supply selling from the word
"selling" used by itself, for selling goes on all the time in the course of daily
activity, but bars and volume may not increase in size as a consequence.
We placed an arrow at the high volume day, and another arrow that
reflects the price activity that resulted. Volume is relative to the activity
surrounding it. You can see that November's volume kept getting smaller.
The 4 December Friday's volume spike stands out as a substantial increase, relative to the past few weeks of trading. It also marks the high of the
current rally and trading range.
High volume spike often are a transfer of risk from weak hands into strong.
In this instance, strong hands are selling into weak-handed holders. Note
how the level of volume has held steadily for the past few weeks, but price
has not been able to extend higher with that increased effort. Smart money
likes to hide what it is doing, but we contend that their activity HAS to show
up in volume because they move such big numbers of contacts that need to
be distributed over time.
When price declined 75 S&P points, during the last half of October, the
level of volume was about what it has been right now. We view this as part
of the distribution process, smart money distributing their long positions into
the hands of "other" buyers that lack staying power. This is how markets
work, and it is how markets have worked on exchanges for over 100 years.
What we are seeing are the final stages of this politically-driven, Fed-fed
rally that is doomed to fail, much like the doomed-to-fail policies of pumping
trillions of fiat printed currency to prop up the same faltering institutions that
were the cause of this financial disaster. The shell game is fast cracking.
The trading range "balance" will eventually be broken, and an imbalance
will ensue. It always does. It is for these reasons we gave the projections
above as a target. The market never lies. It can be manipulated for only
so long, and history is replete with market bubbles, from tulips to houses.
Not even the greedy central banks, with their devastating policies around
the world can hide their folly.
This article is as much editorial comment as it is technical, but the
comments are made to better understand why the technical picture has
been so bent out of shape, as revealed in the distorted action between
price and volume throughout this rally.
The trading range is alive and well, and price will not get very far until it
breaks free of it.