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S & P - Apply Some Logic Here. Do Not Listen To TV Talking Heads

Saturday  8 May 2010

 If you cannot put the market into a cohesive context, do not trade it.  When
there is question as to where the market is or what it may do, the default
decision-making process most often devolves to an ego-driven process. 
The market will chew egoists up and spit them out, routinely, and most
always stripped of their capital, or a good chunk of it.  There is some sound
reasoning to market behavior, and sometimes its message is quite clear.  
At other times, it is not.  This is, and isn't, one of those times.

 The message the market has been sending is a changing of the daily
trend, and we have been saying that for over a week.  What is the most
important piece of information that one needs when trading in the market? 
Regular readers of these comments now know that answer:  THE TREND!.

 If the trend is turning from up, it may first turn sideways, then down upon
confirmation.  The market confirmed a change of trend when price closed
under the 1175-1180 area, last Tuesday.  We talked about the importance
of trends, [see S & P - May You Live In Interesting Times], how the market
was indicating a change in trend on the daily time frame, and in the second
to last paragraph, we gave 1150 as first support, and the 1040 February low as the second target.  Price sailed right through the first  target and fell just
a bit short on the second one.

 No one, absolutely no one could have foreseen the price collapse of last
Thursday, at least not to the extent of the decline.  However, that the market
was likely to decline was already a message the market had been sending,
as we have been chronicling, of late.  What was the basis of making that
determination?  The logic of price and volume behavior, as depicted in
charts, that record market activity.   Nothing of the factual data generated
by the market is hidden.  It is there for anyone and everyone to see.

 Back too the opening statement about not participating in a market if you
cannot put it into a context, the first message is clear:  the trend is down. 
The second message is not so clear:  what to do now?  If the question is
not clear, then logic says, do nothing.  There is no reason to feel compelled
to be in the market every day.  We stick to the knowledge of the first
message, knowing the trend is down, for that tells us to trade from the short
side, or so it would seem.

 We heed the second message, "what to do now," by responding, it is not
so clear, so wait for clarity.  Market participation is a marathon, not a sprint.   Right now, sprinters are scrambling.  Not for us, thank you.  Our primary
interest is in being profitable, not the first in line trying to be right.  To be
profitable, we have to be able to read the market activity as a guide.  Right
now, there is no clear guide, and THAT is the message to understand.

 Longs have been brutally punished, [not without advance warning], and
short positions are now just as vulnerable as the market begins to re-adjust
to the extreme activity of last week.  Why are short positions just as
vulnerable as longs, if we know the trend is down?   Every trend undergoes
counter-trend corrections, and this sharp move down is now likely to be
corrected. This is why we say to apply some logic. 

 We talk about "smart money," defined as those with deep pockets and lots
of information most of us do not have.  What can be said about smart
money is that it buys low and sells high.  That is an axiomatic statement, a
basic market truism.  It is something with which we all must deal.  Smart
money is only interested in large trends.  Day to day activity is not of much
interest.  Intra day activity is meaningless to their program in investing/trading.

 Take a look at Thursday's huge bar range to the downside, [second to last
bar].  Two aspects of that day stand out.  The first is the position of the
close.  It is above mid-range.  What is the significance of the close?  It says
who won the battle between buyers and sellers.  If the position is above the
halfway measure of the range, it tells us that buyers were present, and they
overcame the efforts of the sellers. There is a message there.  In the largest
absolute dollar drop of market value, buyers were "seen" to be present, and
we know that from the location of the  close. 

 Question.  Who do you suppose those buyers were?  We say, smart
money.  Where does smart money like to buy?  At market lows and sell
market highs.  They were present at this recent market low.  Does anyone
think for a moment that the public decided to act in unison and step in and
support the market en masse?  [That is a rhetorical question, in case
anyone might answer yes.]

 The second aspect that stands out is the volume.  Thursday's volume was
exceptionally high, and that would be expected.  Smart money was swooping
in and buying as much as people were selling.  What  is not as obvious is
Friday's action.  Remember, smart money does not like to be obvious. 
Listen to the market "explanations" of the talking heads, and you will never
have a clue what smart money is doing.

 Talking heads on financial networks were saying how Friday was even more volatile than Thursday???  They are overpaid idiots whose main job is to
promote happy news to keep the public interested in buying.  They would
not recognize a turning market if it bit them in their true knowledge center. 
We say otherwise.  Friday was added confirmation to Thursday's conclusion
that smart money was supporting the spill and picking up bargains...[to
resell higher when people see price recover and decide it is okay to start
buying again.  Some things never change].  Remember, smart money
always tries to hide its hand and not be obvious, hence Friday's results.

 Volume is not shown, yet, due to a day's delay in reporting accurate final
numbers.  We watch SPY volume all the time for its greater accuracy, at
least in our limited mind.  The highest volume bar on an hourly chart in SPY,
[S & P cash market], was HIGHER than the volume on the widest range bar
down on Thursday.  There is a clear message from the market, based on

 To appreciate the logic behind understanding the implication of Friday's
close, a brief explanation may be in order.  The objective in understanding
price, as it relates to volume, is to understand how the two are related.  One
shows effort, volume; the other shows results, price.  Results should be
commensurate with the effort.  If price were going up 4 or 5 points every day
on volume effort ranging in totals between 7,000 and 10,000 contracts, and
at the high of the rally, price is up, say 3 points, but volume that day is
18,000 contracts, there is an imbalance between effort, 18,000 contracts,
and results, a gain of only 3 points. Results not equal to effort  = a red flag.

 What this market-generated information is telling us is that a huge increase
in effort produced very little in net gain.  Why?  All of the buying effort was
matched by selling effort, and the effort from the sellers was stronger, which
is why the price range could not extend higher on much greater effort.

 Back to Friday.  Look at Friday's range in view of this new perspective. 
Volume effort was about equal to that of Thursday's huge decline, yet 
Friday's range was much smaller.  The increased effort, [volume] did not
produce a similarly larger range bar.  Why not?

 "But the close was lower!"

 Yes, it was, but it did not go lower than Thursday's low, and both Friday's
low and close are well above Thursday's low.  Why not?

 Most of the damage had been done on Thursday.  Friday was kind of a
mopping up day, keeping the mental pressure on longs who fear yet
another big loss day.  Was there any new damage done?  Not really.

 We mentioned that the Thursday high and low would establish a trading
range for some time to come. [see S & P - The Lines Have Been Drawn]. 
Right now, though many may not recognize it, yet, price is just starting a
trading range.  A trading range is, by definition, not a trend.  In a
non-trending market, price can rally as well as decline.  Given that price is
near the lows already, it is more apt to rally than it is to continue to decline. 
It could go a little lower next week, but it will highly unlikely that we will see
new lows.  Instead, there will be a retesting process, underway as of Friday.

 Until we see some evidence that the retesting process is over, we see no
reason to be in the market, not even from the short side, for now.  We
choose to wait for a set-up pattern of some kind.  What we do know for
certain is that one will come along.

 Waiting for clarity.

S&P D 8 May 10