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S & P - Finally, Supply Selling! A Classic Example


Saturday  23 January 2010

 We have written extensively on the difference between every day selling
activity that occurs as a matter of course, and supply selling that leads to
a change in trend.  We noted on many occasions that when supply enters
the market, it is differentiated from every day selling by increased volume
and violation of previous support.

 On Thursday, when the market sold off on a larger price spread bar and
increased volume, it had not yet confirmed a violation of previous support. 
In fact, price closed right at the top of the October-December trading range,
an area of support.  We had seen quite a few sell-offs like that in the past
only to see price turn around and rally next day, or sometimes two.  A perfect example was from the previous Friday, 15 January, when price sold off but
held support, and then rallied to erase all the losses on the very next  day. 
That prompted us to write the article, S & P - What Makes This Day Any
  In the very last  paragraph, it was acknowledged that we did not
see any supply:  [click on]

      "We do not see any supply.  That could change on Monday, or a week 
       from now, or longer.   One cannot know this in advance, so observing 
       market behavior every day for signs of change is all that one can do. 
       When change does come, there will be no guessing."

 It is always true that one cannot know what will happen, in advance.  All we
can do is observe present tense market activity to get confirmation of what
may occur, based on previous direction and activity.  As we knew to be the
case and which is why we concluded with the very last sentence, "When
change [in the form of supply] does come, there will be no guessing."

 Where Thursday could still pose a question, and a very valid one based on
previous results, Friday made it resoundingly clear that supply selling was
present.   One sell-off day does not a trend change make. Two large sell-off
days, like Thursday and Friday, removes all guessing.  In just two days, price erased the previous month's rally activity, breaking support and on
increased volume, the classic elements of supply entering the market.

 In that same article, we also mentioned, two paragraphs earlier, how this
has not been an easy market.  All that has been missing in this rally, since
last March, and particularly in the past few trading months, has been supply.  Demand had been weak, but selling activity was even weaker.  The past two
trading days has changed all of that and leaves little room for doubt that
rallies can now be sold, for buyers have clearly lost control to aggressive
selling that acted with impunity in driving price down sharply.

 From Thursday's activity, we were looking for a weak rally to initiate short
positions.  There was none.  Friday quickly continued the activity of
Thursday, as price cascaded down in waterfall fashion, leaving no
opportunity to sell a weak rally.  Our rules for trading are specific and do
not allow for "jumping in" on a moving train.  The risk in placing a stop,
based on market activity, becomes as great as the last decline, and it does
not make sound money management sense.

 We have expressed reticence in the past about being long this market that
demonstrated weak demand.  Once supply entered, it would be damaging,
and it made no sense to be exposed to that kind of risk.  Lest anyone who
was long going into the Fall of 2007 that led to the fall that erased a ton of
equity, we were content to be more conservative and miss out on the
upside in order to not be in the way of what could follow.

 Just last Wednesday, we acknowledged that being on the sidelines is
sometimes the best place to be.  S & P - Weak Demand, No Supply, in
the last sentence, [click on].  Resistance is clearly at
the 1127 area, with smaller levels in between.  Now we get to judge the
character of ensuing rallies in order to take advantage of what appears
to be the long-awaited change of trend.