Wednesday Evening 11 August 2010
It has been a trying past two weeks in the S & P market as a trading
range unfolded, and that kind of environment is a nemesis for taking
a position, expecting a trend. We took two hits trying to get short,
anticipating a decline based on weak internals on rallies.
If you see the trading range highs around 1127, for about seven
trading days, even though our bias has been bearish, there is no
apparent ending action, and we fully expected a rally above 1130,
either for continuation or, more likely a failed probe and then a
decline. Neither occurred, and that is unusual. Of course, it was
unusual to see the market rally after a sharp sell-off, at the end of
July, and then rally from another sell-off five bars ago. Both rallies
punished the shorts. Still, the fact that price did not go through the
highs of the 1127 resistance trading range was most surprising.
Yet another intra day rally developed on Tuesday, after a Fed
report, and price closed fairly well, postured to punch through
overhead resistance. Then came today. After digesting the report,
price started to decline in the Tuesday overnight session and into
this morning's opening. Once the day session opened, there was
no looking back as price dropped over 30 points, punishing the bulls.
That enigmatic trading range was a sucker punch to the bears and
the bulls. However, in the end, the bears were finally rewarded with
this large sell-off. We went short after the first hour's close, 1095
area, in waiting for confirmation of a weak close on increased volume.
For the entire day, volume on this decline was the highest in a month
and a half. This is a text book example of what supply looks like:
1. Wide range bar to the down side
2. Poor close
3. Increased volume
4. Breaking previous support(s) and/or trend lines
You see all four in one. Additionally, just one day's action erased
the previous seven trading days, and price exceeded last week's low
to make a new weekly swing low. There was a lot of damage done for
anyone looking for higher prices. In fact, just a few days ago, the
talking head commentators on TV were calling for 1200, even 1300
S & P.
We have said it before, let the market confirm itself and then follow
the market's lead. No one knows how this decline will unfold, nor for
how long. All anyone can do is react to developing market activity
to see if it confirms continuation to the downside. There was a total
absence of any demand rallys throughout the day. Weak rallys =
lower prices. Price will continue to decline until buyers are able to
overcome sellers and regain control. For now, sellers dominate.
Short and awaiting further development in what appears to be an
increasingly negative environment.