Wednesday 28 April 2010
Yesterday was an excellent example of assessing a market and acknowledging
that change can occur at any time. In our last article,
S & P – Corrections Say Normal Trend, mention was made that until new price
information developed, the trend remained up, and we expected downside
follow-through. What we also said is the exent of the downside, if any, would
help determine if sellers are able to wrest control away from buyers. Who
knew that price would drop 2300 tics?
What we learned from yesterday was, 1. the intra day trend is no longer up.
At a minimum, that time frame is now in a trading range; 2. the daily trend is
near turning, as well. What we have suspected for many weeks is also
developing but hard to explain.
Many of the highest volume days have been to the downside. Normally, that
is a sign of change. Yet, in every instance, price recovered and went on to
new highs, negating the effects of the red flags. With yesterday’s huge drop,
on the highest volume since the February low, we are witnessing the process
of distribution.
What is distribution?
Smart money is not only unloading long positions, but also beginning to
accumulate shorts, at the same time. We have held this view for several weeks
now, but as long as new highs were part of the program, it was hard to promote
the idea of distribution. Just look at the last few highs on the chart below.
There was a small range high 10 bars ago, followed by a high volume decline,
and then the Monday small range high, followed by yesterday’s even larger
decline on even larger volume.
Years ago, on Saturday Night Live, Don Novello used to do a parody as a
priest. He would ask viewers to “Find the Pope in the Pizza,” like “Where’s
Waldo?” The point? Try as they may, smart money participants cannot hide
their deft hand, totally. When we look at charts, we are always trying to find
the smart money hiding their intent. They do huge volume, and it has to show
up somewhere. We are “seeing” their hand, in part. At a minimum, we will see
a correction, maybe on the order of the January correction, or a change of trend.
Two thoughts on that. One, the weekly chart remains up, and it takes time to
change a trend. Two, we are mindful of P T Barnum’s quip, “There’s a sucker
born every day.” Not a popular sentiment to advance, but we believe the public
is being duped by this protracted rally, stimulated totally by Federal Reserve
indirect intervention with their unlimited amounts of fiat, paper “dollars.” All
shorts, up until yesterday, have been punished relentlessly during the rally that
began in March of 2009. This has been a top-picker’s nightmare. [There is a
reason why we say to always trade with the trend].
So, the public is being conned into believing the rally will “never end,” and
shorts have been severly punished. It is at points in time like this that
distribution occurs, and that leads to expnad more on our second thought.
The distribution process can take many forms. One is a sideways pattern, as
is developing now. What we suspect is the potential for yet one more new high,
at some point in the next several weeks, to make sure everyone is a “believer”
in the ability of the market to sustain the trend, and then the boom gets lowered, big time.
The above is just an opinion, and like no one could know in advance that the
market would drop so precipitously as it did yesterday, no one can know how
price will develop over the next several weeks, let alone the next day. However,
one can have an idea of potential possibilities and to the plan accordingly, as
market activity develops.
Remember from yesterday’s chart, so far, every reaction has had only one or
two day corrections in the form of a lower low. Today is day two. We need more
information to better plan how to trade what is developing. What kind of
information? The quality of how the market responds to yesterday’s break will
be a start. There will be time to take advantage of what is developing without
having to guess, or hope. It is a matter of letting the market tell us, just as it
has been telling us for the past several weeks.
