Monday Evening 21 June 2010
The market continues to speak as it rejected higher values, exactly
at a 50% retracement that became resistance. Mention was made
that 1130 was the half-way mark, based on the weekly chart, and the
rally high was 1129.50. Although no position was taken, last week,
we did indicate that the structure of the market looked weak. After
rallying in response to the Chinese Yuan news, over the weekend,
price proceeded to decline 27 points. One could call that a weak
What resulted from Monday's wide bar range was an outside key
reversal: a higher high, lower low and a slightly lower close. Two
possibilities emerge. One, price could remain in a trading range,
bound by Monday's high and low. Two, the weakness will continue.
It may be preceded by a weak rally, but a retest lower, even as far
as the 1040 area, could be in store.
It is clear that few expected to see such a dramatic rally, and few
expected to see that rally not only fully erased, but decline under
Friday's low, as well. This tells us that no one can know in advance
HOW the market will develop, and it is why we always say to wait for
developing market activity to point the direction for taking a position
with a higher degree of probability that the outcome will be positive.
Two potential scenarios were given above, but anything can happen,
so we have to wait and see if a weak rally unfolds or if downside
continuation accelerates before a rally develops. The point is, not
knowing HOW price will unfold, wait for it, and then be in a position to
respond. It may sound like a broken record, but it does reduce risk
exposure when the trading environment is uncertain.
Uncertainty will never be removed from trading, but seeing how market
activity develops, there IS a rationale in what it says, along the way.
We are adding a Natural Gas chart to amplify this point.
To further demonstrate how markets are not random, as many
non-technically oriented people like to espouse, and books have
been written about the randomness of markets, but we are not in
that camp, and for good reason. This chart was added to show an
unrelated event, but one that gives notice of what the market is doing.
Mention has been made that when you see over-lapping bars, there
is a battle going on between the buyers and sellers. It is best to wait
and see how it is resolved. We bought the breakout in Natural Gas
back on 11 June, [See Natural Gas - A Special Type Of Trade, click
on http://bit.ly/ciqvvF], but we got out too soon, just under 5.000
before the market moved into a sideways trading range, higher, and
led to the over-lapping bars.
Where to get back in, once out and price rallies higher?
When the overlapping bars developed, we did not know the outcome,
and were prepared to buy a new higher breakout, but it did not
happen. Reading the developing market activity said to wait.
Monday's sharp decline shows why. The market activity was rational
in the sense that it was giving a message of an unresolved battle. We
have seen over-lapping bars before, and we will see them again. They
do not tell you the outcome in advance, but they do say to exercise
patience. How random can that be?!
The read on the S&P was not as clear, but the market was sending
mixed messages in the latter part of the rally, just prior to Monday.
The outcome was unknown, but there was reason, based on how the
market developed, to exercise caution and stand aside. This way,
one does not get caught in the wrong direction, irrationally trying to
outguess the market.