The major indices have been able to bounce off the Nov 2009 lows which allowed them to catapult back above the old 2010 support levels. This is positive action but is only the dumb money buying right here? The answer to this question is yes.
First off, when we broke those 2010 lows, we broke them on heavier volume then when we pushed above them. This type of volume action is negative and has been seen since the May market top. One thing to consider about the volume is when we breached those old lows, stops were triggered and additional selling took place from both those stops being triggered and new shorts initiating positions. The move lower was strong but just burned itself out at the next support area, the November 2009 lows. So there could be a case made that the heavier volume was a positive thing, that it was capitulation and a bottom was being put in. We say no, at least not yet.
Due to the lighter volume nature of this bounce and the nasty downtrend we are in we are still on high alert for another move lower. Yes we are in both a short and intermediate term downtrend and more or less a bear market (down 20% or more). This means most moves higher are shortable and should be sold into until the trend changes. Now that we are no longer in oversold territory over the short term, we have to look at what will stop this bounce.
Where is Resistance?
To keep it simple, the obvious places for a bounce to stop is at areas of resistance. Those are areas where oversold turns into overbought and are areas where profits are taken and where those on the short side re-load. Whether one uses these indicators in their own trading or not means little to how valuable they are. One thing we have spent the better part of 20 years learning is what other professional traders take their key from to either buy or sell. Once you know this and can see which one is currently in control you can unlock the secret to a stocks movements and predict with a high degree of success where the stock or index goes next.
One basic but often disregarded area where a high amount of shorting can be expected is at the longer term moving average lines. Take a look at the 200 day and the 50 day moving averages. The 50 day is now clearly sloping downward and is below the 200 day ma. Due to the nature of moving average lines they are lagging indicators by nature(meaning when they are positioned like this they have confirmed a downtrend but will not pinpoint a bottom until after it has happened) This is the first week we have seen the 200 day moving average line trending lower. This means expect heavy, heavy resistance at these levels. Why do we expect to see heavy volume resistance now? The answer is because not only are the players who have been shorting this move lower since May getting ready to re-short , but the players showing up late to the shorting game will now start shorting as well. Here are the 3 types of shorters who will be shorting at the next resistance levels ( Those shorters who use the 1)a downward sloping 50 day MA as a signal, 2) using the 50 ma crossing below the 200 day ma or 3)using the 200 day ma negative slope as a signal) These 3 types of shorters will be ready and waiting to short at both the 50 day ma and the 200 day ma.
There are 2 other sell signals that are about to trigger and possibly before the sell signals mentioned above. 2The two other places to look for heavy resistance are the 21 day moving average lines(lesser resistance) and the downtrend line going from the May peak to the June dead cat bounce high(Big resistance). The 21 day moving average line will come into play first and will be a good test of how strong or weak this rally is. The market will most likely break through this level but if it doesn’t the market is weaker than first thought. The downtrend line going back to the May top will most likely prove to be the top of this market run even if we never reach the 50 and 200 day moving average lines.
You can see the resistance levels we mentioned above in the charts below
Click charts to enlarge
There are very high odds that the levels we have pointed out will become resistance and will stop any market rally dead in its tracks. As our readers and subscribers know we have called both the January top and February bottom. We also called the May top when we saw heavy volume churning action and railroad track patterns forming This allowed our readers to start taking profits and close positions before the 20% decline sucked a majority of fund managers down with it. Despite all of the other professionals having their second worst quarter on record we navigated this market pretty easily locking in big gains and keeping losses small.
We aren’t telling someone who normally doesn’t short to go out and get short at the up and coming resistance levels if they don’t feel comfortable. What we are saying is at least take profits before we get to these levels and DON’T BUY at those resistance levels!!! This is where the dumb money buys, they chase a stock rallying into resistance levels and are left holding the bag. Trades like those can trun into 40% losses in a matter of weeks.
Whether we like it or not this is the path we are on and will most likely play out according to plan at least for this next move higher. You could get greedy and play the remaining 2% bounce (6-8% for the looser stocks) but just remember the market moves lower much faster than it goes higher so a gap down may turn your gains into losses overnight.
Disclosure: no positions