Monday 14 December 2009
One advantage of relying upon present tense market information is the
adaptability afforded as new price information develops. That adaptability is
self-imposed, for it does not happen automatically. We have been tracking
Crude Oil since October for its cluster of closes,
Crude – Cruising On Cluster Closes , but the price development did not occur
as we figured it might. The importance of utilizing present tense price activity
is that it acts as a guide, to confirm or not confirm expectations. While bullish,
we still needed a legitimate reason to be long, and present tense information
was not providing confirmation.
As we have also stated, we could simply be wrong in the analysis provided, and
in using the cluster of closes as the compass, it turns out to have been off
course. That being the case, one must adapt to any change in developments,
so we take a look at the market for other clues. The weekly chart shows how
price sliced right through anticipated support around 72.00, and when that level
was broken, volume increased substantially. This is an important pice of market
information.
Large volume spikes, depending upon where they occur, most often denote a
transfer of risk, usually from weak hands into strong hands. Keep in mind
that demand comes from lower prices, just as supply comes from higher prices.
That means if a market is to go up, demand must enter the picture when price
declines. One thing that is axiomatic is that smart money does not buy high
or sell low. If smart money does not sell low, who would be doing all that
selling? Weak hands selling into strong hands, as demand come in from lower
levels.
We have talked about 50% being a gauge for market strength or weakness.
If declines remain at or above 50% corrections, it tells us the trend is relatively
strong. If rallies remain below a 50% level, it indicates the down trend remains
intact. The larger horizontal line represents the half-way mark for the rally from
the Dec 08 – Jan 09 lows to the recent October highs. That any correction since
the last April swing low has stayed above the half-way mark tells us the the
primary trend is still relatively strong.
Despite a price correction lasting over two months, the downside has been
somewhat limited in that there has not been a lower low, and the culminating
sell-off on such high volume, last week, held right near the shorter term 50%
range. [50% is a guide, not an absolute number]. Where the analysis relying
on the cluster of closes has been off, the market is still in an up trend, and we
know that knowledge of the trend is the most important piece of information we
can have as a guide as to which which side of any market we should be trading.
[see http://www.edgetraderplus.com/, click under Free Articles, “How To Trade
Successfully In Any Market,” or get our “Top Ten Tips To Successful Trading,”
located on the main page].
The important clues we can deduce from the weekly chart is that the trend is
up, and it appears that demand came into the market as price reached a lower
level. Plus, price is holding at a 50% retracement. This is the information that
present tense activity presents to us, and we use it to advantage, if we can
find an edge.
Let’s look at the daily chart on Crude Oil.
As the weekly shows, the daily does as well…the lows are progressively higher,
and it looks like the high volume sell-off from 9 December could have been
climatic selling volume. Yes, price has gone lower, but it is still holding relatively
close to where price closed on the 9th. We have pointed out in previous
comments that the decline in Crude Oil has taken now 37 trading days to correct
an 18 day rally. This, too, is an important piece of information that all the effort,
over twice the time span, has not turned the trend. It has weakened the daily
chart, and the intra day trends are down, but all of the parts of the puzzle under
consideration are showing net positive signs in what seems to be a negative
price environment.
The comparison we made of this sell-off to the last sell-off, starting in August,
has not changed the picture. See Crude Oil – Hindsight Is So Much Easier!,
5th paragraph. This tells us the the current decline is not out of line with recent
decline activity, when price resumed its rally in late September. Now what we
need to see is confirmation that the decline to 70.80, today, is going to be the
low. The way we will be able to make that determination is through, what else,
developing market activity, as viewed in the present tense.
What we know now is that the primary trend is up; the daily trend has been
weakened but has not turned down, so we should be looking for reasons to buy.
We also know that the intra day trends are down, so there is no reason to be
bottom-picking, aka guessing, to get long. We will wait for the intra day trends
to change and be in harmony with the primary trend, and from that, we will find
the edge needed to go long and keep risk defined.
Darwin proved that those species that adapted to the changing environment
are the ones that survived. The same premise holds for traders. Those who
best adapt to changing conditions will survive, and maybe even thrive. We now
simply wait for the market to show an entry, if the trend is to remain up.
