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S & P - First Gather All The Facts. Then Make An Informed Decision.

Tuesday  18 May 2010

 How prescient and timely was the last article stating that not every day is a
significant one.  Of course, that was not meant to apply to Monday's trade,
for yesterday provided some significant information.  This is a perfect
illustration of how one can never know how a market will unfold from one day to the next.  Yesterday was a bit of a surprise, and one with a bullish
response.  Now on to gathering the market facts.

 Always, always the first determination is identifying the trend of the time
frame under consideration.  The chart below is daily, and that trend has
been determined as being down.  The overnight low, Sunday evening into
Monday morning, was 1120 with a rally up to 1140.  In a down trend market,
this is clearly a show of some responsive strength. 

 Price corrected to 1130, which is a 50% retracement.  When price can hold
a 50% area, it indicates some underlying strength.  Once the day session
was under way, 1130 was tested again, and held.  That was sufficient for us
to exit remaining short positions at 1133, short from 1158.  As it turned out,
rallies after the exit were weak, and the likelihood of 1130 support failing
became stronger.

 Not only did 1130 fail to hold, but so did the overnight 1120 low.  The next
level of support, 1115, gave way, just a bit, as downward momentum carried
price to 1112.  What happened as the low was registered is where the
observable facts become important. 

 On an intra day SPY chart, [cash S&P market], not shown, the highest
volume bar occurred right at the low, on a 10 minute chart.   This suggested
the potential of stopping action.  The 60 minute chart also had the highest
volume bar, at the end of that period, and the close was mid-range.  A
mid-range close on increased volume at the low of the day tells us buyers
were present.  It took a few more hours, but price held steadily and then
began to rally, closing back near the highs of th day.

 We know that 1120 was the overnight low, and it was followed by a 20 point
rally to 1140.  Once the day session began, the weakness exhibited by the
market was a non-stop decline, taking out the established low.  There are a
few observations to be made in that regard.  The breaking of the overnight
low did not lead to continued weakness.  Price recovered and rallied about
23 points.  The day session low, actually 1112.75, held above last Friday's
close.  That, too, is a subtle plus in this market environment.

 Volume was strong, about equal to, maybe even greater than Friday's
volume.  With the close near the high end of the bar, we can state that the
buyers dominated by the end of the day.  These things happen in a down
trend and should be recognized because it makes a selling strategy more
respectful of the potential counter-trend rally.  All of these observations are
undisputed facts about describing market activity.

 What do they mean within the context of a down trending market?

 It tells us that the potential exists for a retest of the 1175 area.  Will it
happen?  Too soon to tell, but prior to yesterday, the 1154 - 1160 area
looked like an area of resistance that price could retest.  It is still the first
area to watch for how any retest goes, but today also puts the 1175 area
into play.  Now we get to monitor the developing strength or weakness of
an expected rally to come out of today's impressive performance.  How
that rally unfolds will determine when and where new short positions can
be added.

 Keep in mind that price can continue to develop and rally above 1175,
maybe even change the down trend status.  This is a lower probability, for
now, but we must remain flexible in viewing the market be able to adjust to
newly developing information.

 Conversely, if a market rally is weak in development, it will increase the
growing probability of yet lower price levels in a greater down move.

 Short positions from 1158 have now been covered at 1129 on Friday, and
1133 on Monday.  In a down trend market, we are flat, for now, for all the
above factually-gathered reasons.  Now we wait for new market clues to
develop and be ready to respond appropriately.

S&P D 17 May 10