Thursday 21 January 2010
Last week, we brought to your attention the Nas/S&P E-Mini spread as a
leading indicator for market direction, NAS -E-Mini Spread - A Clue For
Market Direction, click on http://bit.ly/8JyYYC. We take another look at it
today and compare it to the daily S & P chart to show what may be a
divergence in the spread's leadership.
4 September and 17 December are indicated on the spread chart to be
compared to corresponding dates on the daily S & P chart. The S&P price
was cut off around the 4th, but price was under the highs from a week or two earlier, while the spread was already breaking upside out of the same
trading range, leading the way up.
The spread was also leading the way out of the November/December
trading range several days before the market did. A quick comparison
between the two charts and dates shows this clearly. Right now, the spread
is struggling, having made high on 4 January, a full week before the market
high on 11 January. It continues to make lower highs and lower lows. The
market, by contrast, has remained sideways in a rather dramatic fashion,
down 1300 tics, up 1300 tics, down 2200 intraday...evidence of a trading
The leadership quality of the spread has been lagging. Based on previous
early signs, it is difficult to see the market rallying until the spread turns back
up. It is too soon to know if the spread is signaling a turn, or maybe it is
obvious already and the market may break recent supports and turn down.
We will get confirmation of a market turn if and when price breaks under the
1150 - 1125 price levels defining the range.
The weekly trend remains up, but progress is laboring. The daily trend has
fast become range-bound in a January trading range with an upward bias,
and the intra day trends are in a trading range making sharp up and down
moves. The sharp moves intra day are signs of a battle between the forces
of supply and demand.
Volume on Wednesday's wide range downside break was greater than
previous breaks, but the lower end of the range held the selling efforts.
Buyers successfully defended their territory as shown by the close, just
under mid-range on the bar. The only way we will know which way price is
headed, with any degree of staying power, is when the highs are exceeded
or the lows. Until then, the current trading range struggle continues.
The spread is suggesting a break, but it needs another lower close under
730 to confirm its leadership has turned down, and the market will soon
follow. What we need to do as traders is to wait and follow the tape.