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S & P - Never-ending Trading Range? Act, But Beware Of Complacency

Monday Evening 21 December 2009

 As Yogi Berra would say, "It's deja vu all over, again."  The trading range
continues, as we figured it will, at least for December, but...anything can
happen.  Those last three words are probably second in importance to
knowing the trend.  "Anything can happen," usually happens when least
expected, and very often when it does, it happens with a vengeance.

 Today's chart is an intra day 60 minute one.  For our purposes, we use
day session only price data, and it suffices.   The current trading range
has been in progress for over a month.  Each time at the highs, buyers
have carte blanche opportunities to run away to the upside with this market. 
Each time, it just does not happen.  There is not enough demand buying to
break the stalemate.  We discussed supply selling in
S & P - Trading Ranges And Bubbles, 6th paragraph.  Demand buying is
the opposite.

 Demand buying is noted when there is a wider, or series of wider trading
ranges, on substantially increased volume, and price breaks out of a
previous resistance area.  This is differentiated from regular buying activity
that occurs every day in normal activity.  Demand buying is also different
from short-covering, also a different kind of buying activity.   Each have their
own characteristics and place in various chart scenarios.

 If you were to gauge the heaviest volume activity of the last several trading
days, today's was almost average, a shade under.  Look at where it
occurred: at the top of the trading range.  What this tells us is that there was
a lack of demand buying.  How do we know this?  Price did not extend itself
up and beyond the resistance high of the trading range.  Demand activity
would have shown the heaviest volume and wide ranges extending higher.

 Trading ranges are different animals.  They require the opposite of normal
trading, which is to buy on strength and sell on weakness.  In a trading
range, one has to sell apparent strength and buy apparent weakness. 
Today, we sold apparent strength, primarily because resistance keeps
containing and repelling rallies, and for the lack of demand, as discussed.

 There is another reason.  In a defined trading range, as this one clearly is,
one of the least risky areas to sell is the upper 25% of the range, just as
one of the least risky areas to buy is the lower 25% of the range.  We have
identified the upper 25% on the chart, between 1105 and 1115.  We sold
1108 late in day when price closed under the day's trading range, second
bar from the end, on increased volume.

 The close was under the five previous 60 min bar closes, and the fact that
volume increased tells us that sellers were more active that buyers, based
on results of the poor close.  If you note the 5th bar from the end, it was a
probe to go higher, but there was no volume effort behind it.  There is an
example of mere buying activity as opposed to demand buying.

 We can be wrong on this, and demand buying can rush in tomorrow, but
we have to go on what we know, and what we know is that price failed to go
higher on weak demand in the upper 25% of a defined trading range.  If we
are wrong, we will be wrong for the right reasons.

 There are a few other caveats attendant with this trade.  Price remained
in the upper range of the entire day without selling off, despite increased
volume on what selling there was.  The other one is the age of this trading
range.  The further along the right hand side of a developing trading range,
the closer it is to a final resolution.  Trading ranges try the patience of most
traders, waiting for a directional move to get underway.   We have
characterized this development more as distribution, rather than
accumulation. The latter would lead to an upside breakout, but demand has
been absent.  With a lack of demand, the only thing keeping price up is an
even greater lack of supply selling.  If any amount of supply selling on
increased volume entered the picture, price would fall hard.  For now, we
deal with what is.

 What is, for now, are the high end of the trading range, resistance, and the
lower end, support around 1080 - 1085.  Until broken, we get to use them
as a trading guide, much as we identified a channel in the British Pound,
yesterday, British Pound - How To Cover A Short Position In ANY Market
Starting with the 9th paragraph, we discussed how channel lines can act as
a guide, but it depends on HOW price approaches and REACTS to them. 

 In the S&P, price approached the upper resistance line in a WEAK
manner.  The REACTION yet remains to be seen.  We draw this comparison
to show how the tools of trading, using price and volume activity, are the
same no matter how varied the circumstances.  The markets always adhere
to the unchanging principles of supply v demand.

 We know for certain that price is on a trading range.  We also know for
certain HOW it was just retested.  We also know for certain that trade
location is very good.  Now we get to await the uncertain results.

SPH 60m 21 Dec 09