Monday 10 May 2010
While knowledge of the trend in the time frame under consideration is
important, it is equally important to be aware of the trend of the next higher
time frame. The daily chart is most frequently followed, and many use the
smaller time frames, as well. Fewer resort to a weekly time frame, or even
higher because they take longer to turn, and they typically are not timing
tools. Still, the importance of the higher time frames cannot be overlooked.
It is very possible that the damage wrought from last week's dramatic
decline may have ended the up trend of the weekly chart. As in all
considerations for analyzing a market, any market, and stocks are no
different from futures, confirmation is required in order to pursue a course
of action with confidence. What will confirm that the weekly trend has
changed? Just as in the daily, a rally that fails to exceed the April high,
creating a lower swing high.
One of the elements in defining a downtrend is lower highs and lower lows
from the preceding swings. If we look at the previous swing lows, A, B,
and C, they are all higher lows. There has yet to be a lower swing low
since March of 2009. So many egos want to be first in line to proclaim what
the market will do next. We never know. We have ideas, based on
developing market activity, but we always defer to that market activity as the
final arbiter as to what will happen. All we can do is gather the facts and
make a determination from them, whenever possible. Until we see a lower
Right now, the daily chart is making very wide swings, increasing the risk
factor if one is wrong in their assessment. We thought it would serve our
purposes to look at the next higher time frame to put what is developing
into some kind of viable context.
From a factual observation, the weekly swing lows are becoming greater
in intensity. Note how swing low "A" never came close to retesting the
March 2009 low. Swing low "B" was only a two week correction that held
above both the June high and a 50% retracement of the previous range
with the "A" low. We can see from "C" that its correction lasted three weeks
and almost reached the swing low of "B." At "C," the correction is much
stronger, and the upside progress that preceded it was weaker. The current
low, at "D," may or may not be finished, although the likelihood is that it is
finished, at least for now, and it shows the strongest reaction from a high,
perhaps breaking the trend.
As we said of the daily chart, the high and low for the next several weeks,
possibly months, have beenestablished,
[see S & P - The Lines Have Been Drawn]. We called last Thursday a
selling climax. While it has some of the characteristics of a climax, its
location makes it unlikely, but that is a different issue.
Note where the decline from the 2007 market highs picked up speed,
evidenced by wider range bars and increased volume. That would be
October 2009, starting just above the 1200 price level. Where did this
current rally fail before this huge decline? 1216, just about the same price
area. Remember, prices are not absolute. Think in terms of areas and not
a specific price, and be aware of HOW the market responds to the area. In
this instance, price again backed off with abandon from the 1200 area, to
include the 1216 specific high.
THAT is what is important: HOW price reacts to a particular area or price
level. Price dropped quickly from the 1200 area in October 2009, and it
dropped just as quickly from the same area in 2010. We can see that a
lower swing low has not yet occurred, despite the quality of a strong decline,
last week, so we must keep that in mind when gathering ALL the facts, not
just the ones to support a particular point of view.
What is key to focus in on, at this point, is to watch the developing market
activity in the next several weeks ahead. We want to know the quality and
character of HOW any retest rally develops for that will determine how to
take positions in the market to be in harmony with the developing trend.
The likelihood of a rally is strong here, on either chart, daily or weekly.
What about the trend? Ambiguity is a fact of market trading. The daily trend
can be said to be down, but we could see a sizeable rally to retest the April
high, or more importantly, a test of the 1205 area where the last daily rally
failed and led to the last strong decline. That leaves about 90 S&P points
room to rally in a downtrend. It makes no sense to be short under this kind
of environment, and that is why we said to be on the sidelines since Friday,
[see S & P - The Lines Have Been Drawn, last sentence].
The probability of some kind of rally is greater than continuation down. If
the weekly trend is no longer up, at a minimum, it will move sideways in a
trading range before going down. That is the normal process of market
behavior, and despite the price aberration from last Thursday, markets do
move in identifiable phases. What we have to account for and adjust to is
how long it may take for a phase to develop and run its course.
Like we said, the weekly time frame is not to be used for timing a trade, so
no recommendation to buy or sell is made from this perspective. What we
are doing is putting the factual observations into a context in order to be
able to make an informed decision using the lower time frames. Look for
support between 1056, more likely 1090-1110, and resistance starting
around 1160 up to 1205.