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S & P - The Market's Message Remains On Point? Watch Results, Not Just Price.

Monday 31 May 2010

 In the last article, mention was made to heed the message of the market,
for sometimes, it is clear.  This does not always mean it is easy, otherwise
everyone would be making money all the time.  The market's message, as
shown through price and volume behavior to depict the driving forces of
supply and demand, most often has the message's theme running
throughout.  What was noted in the article was a change in volume
behavior, [S & P - Heed The Market's Message, click on http://bit.ly/bi4LtH,
second paragraph].

 Given that the larger time frames are more controlling than succeeding
smaller time frames, let us start with a weekly chart, and work our way down.  This past week's close was upper end, letting us know that buyers prevailed, the close was a bit higher than last week's close and also above the
opening price.  These are all positive observations.

 To keep a perspective, we must state that volume has been stronger on
the wider range down bars, of the last four, and this paints a more negative
environment.  The month of May erased the rally efforts going back to the
first week of November.  That is six month's effort negated in a single month. 
We take this as a current potential rally developing within a larger down
cycle, just getting underway.

 

S&P W 29 May 10

 The daily chart shows a double bottom formed, marked by the 1036.25
February low, and the 1036.75 May low from last Tuesday.  The Tuesday
low stands out because it exceeds all of the past May lows, including the
6 May dramatic one day decline.  There are two higher lows on either side
of the Tuesday low, and we interpret this as Tuesday being a washout of
any remaining stops, with a retest low from Thursday.  Note how the
Thursday bar, second from the end, is a wide range rally with a high end
close.  Buyers were clearly in control.  This was mostly due to short-
covering, and we know that because volume was not as strong as the
recent down days.

 Friday's close is classified as  key reversal, [a new recent high with a lower
close], a sign of weakness.  Well, we already know the market has been
weakened, so this is no surprise.  What can be noted is the decline in
volume for Friday.  Yes, it was a holiday weekend, but volume was still low
relative to the event of the key reversal.  This tells us that selling pressure
was not that strong, and we can see that the close is above the  four day
highs prior to Thursday's rally.  These are all observable facts that tell a story.

 From the daily chart, we can infer a likely retest of last Tuesday's low.  Or
so it would seem.

S&P D 29 May 10

 This is where it gets a little more interesting and supportive of the identified
change of volume behavior on the 26th's higher swing low.  Instead of
downside follow-through on the 27th, price rallied strongly, and we attributed the seemingly unexpected rally to the behavioral volume change the day
before.  It was for this reason we chose not to go short at that point of
weakness, even after the market failed at expected resistance near 1090,
[note the failed highs of the 21st, 23rd, 25th, and 26th].

 The ability of price to rally above 1090, and stay above it, prompted us to
get long Thursday at 1097.  The message of the market suggested
continuation, and following the volume change, we were heeding what the
market was saying.  On Friday, the message began to change.  There was
no sustained upside rally.  Once price broke the initial intra day low of 1094,
we stopped ourselves out at 1093.50 for a small loss of $150 per contract.

 From that point on, price exhibited erratic behavior and closed near the lows of the day.  Ostensibly, it would seem, once again, that weakness will lead to
lower prices, but we are not totally convinced.  No short position was initiated as a precautionary measure due to the uncertainty.  Price did close weakly,
but the close is right at previous resistance, the 1090 area.  There was no
decisive break of what has now become support.  [Previous resistance
becomes support, once price rallies above it].

S&P 60m 29 May 10

 The 10 minute time frame is the weakest from which to draw a conclusion,
but the intra day time frame from the 26th told us not to follow the apparent
weak close.  Note the price events as they unfolded on Friday.  A wide
range decline bar leads to a high volume low bar just before noon, 12 p.m.. 
There was a weak rally, and from that weak rally, we could expect another
decline.  Price made a new low at 1083 around 1 p.m., but on much less
volume.  This tells us that the selling pressure was considerably less, and it
was a likely probe to see how much selling would develop.  None did.

 During the last hour of trade, another rally ensued, and it looked like a
recovery was underway only to see price drop quickly in the last half hour. 
However, notice the volume.  The last two highest volume bars are occurring as price declines, but the decline remains above the previous 1 o'clock low,
and the second high volume bar closes above  mid-range, evidence of
buyers present near the lows.

  Put this into context with the 60 minute chart and that the close did not
decisively break the 1090 support, and we are suspect.  Maybe the last two
high volume bars are stopping volume, and if so, will fool many just looking
at the weak close.  Remember, it is not just where price closes, but HOW
that is important.

 Contrast those two specific sell-off volume bars with the previous sell-off
volume bars when their respective lows occurred.  The question we ask is,
why didn't the considerably increased effort produce greater results?  A
red flag, at least for us.

 We also cannot escape a comparison of the 10 minute chart with the daily
in how the lowest low held.  Keep in mind, this smaller time frame pales in
comparison to the higher time frames in importance, but just like on the
26th's change of volume behavior, we are not following this apparent
weakness with a short position.  The market may prove our read wrong, and
not for the first time, but we stay with our instincts.

 It is not always easy to capture the intent of the market as it develops in the
present tense.  It still appears that price can retest the 1120 area, and
depending on how price gets there, if it does, there is still always the 1075
area as a potential retest.

 When in doubt, stay out.  That is where we are.

S&P 10m 29 May 10