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 market.
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.
