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S & P - Heed The Market's Message. Sometimes, It Is Clear.

Friday  14 May 2010

 The market showed the kind of weakness on Wednesday's rally we wanted
to see within the down trend to warrant a short position, yet we opted not to
follow it.   Previously, this has been a sell signal, but not then.  We had
already made a determination that buying was entering the market on the
sharp  declines, [See S & P - A Set-Up In The Making,
click on, starting with the second paragraph].  What
started as a decline late Wednesday turned into a huge gap up rally on

 On the chart below, at the close on Wednesday the 26th, there was a
change of volume behavior.  Any time a change of behavior develops, it 
is a red flag.  Coupled with the observation that buyers were entering the
market, there was evidence of buying on the close, and this was the
behavioral change. The chart includes overnight price data, but 3 bars
from the low on the 26th is the highest volume bar, but the net downside
gain was minimal, and the low was not much lower than the wider range
bar that preceded it, [4th bar from the low].  A smaller range on the second
highest volume in several days is a sign that buyers are meeting the effort
of the sellers, otherwise, the decline would be much greater, and that is the
red flag mentioned.

 There was no indication that a 35 point rally would follow, as it did
yesterday, but the developing market activity gave an indication that some
rally may be possible.  You can see from the highs from the 24th and 26th,
1090 was an area of resistance.  Once the day session began on
yesterday, and price was 30 points higher, volume was light, and sellers
could easily push the market lower.  As long as price stayed above the 1090
previous resistance, and it would become support if it held, and it did.

 An hour and a half before the close, we saw a wide rally bar on increased
volume make new highs, and this confirmed that the 1090 level would now
be support.  We took that as a signal to take a long position.  The close was
near the high of the day, up 35 points, and that indicates there should be
some upside follow-through on Friday.  It may not happen, but that is what
market activity is indicating.

 Tomorrow starts a holiday weekend, and prices tend to firm.  A higher
close would be a key reversal on the weekly chart, and this supports the
contention that some kind of rally is in the cards.  Where and how price
closes on Friday will provide new information, and it will tell us whether to
stay long, or not.

S&P 30m 28 May 10