Monday 23 November 2009
“Speculation is as old as the hills. Whatever happens in the market today has
happened before and will happen again.” -Jesse Livermore, Speculator King
The following is an example of reading developing market activity that captures
the essence of the above quote by Jesse Livermore. Markets offer unlimited
opportunities every day, and it rewards original ideas. It is somewhat ironic
that any current technical analysis considered original is really an event that
has already happened so many times in the past.
This analysis is of the current situation in Crude Oil futures, far removed from
the minds of many who dwell only in other futures or only in the stock market
and cannot comprehend a connection between this analysis and any other
market or specific stock(s). Bear in mind that we know nothing about the crude
oil market, not even the size of the contract. What we see is an opportunity in
a market that happens to be this one. As you read the analysis, forget about
crude oil, even futures. Instead, focus your attention on the principles behind
the analysis for this could just as well be your favorite market of particular
stock.
We have covered Crude Oil since its recent breakout in mid-October. Some of
this material has already been presented, but this will be a comprehensive
analysis of how to read and interpret any market on any organized exchange,
stocks or futures.
Our first start in any market analysis is to identify the trend, for it is the path
of least resistance. The objective for consistent and successful trading or
investing is to be in harmony with the prevailing trend of the time frame in
which one is considering for a position.
To keep one’s attention focused on the guiding principles and away from any
bias toward trading or just futures, most references will be aimed directly to
market activity because developing market activity applies universally.
We previously described the price breakout to the upside,
Crude Oil – Picture Perfect Breakout, which presented an excellent buy
opportunity. The first chart is unmarked so you can look at it and decide what
you see from whatever perspective, experience, or ability you bring to
assessing a market opportunity, or seeing no opportunity and take a pass.
So make your own judgment before proceeding.
Chart 1
The next chart is a weekly to put the market into a context, similar to
identifying the trend, getting an overall perspective. One can see that price
ran into resistance in June above the 71.00 level and again in mid-August
slightly higher, around the 75.00 area If you look at price, it appears to be
in a trading range, moving sideways for five months. We can get a better
idea of the character of this trading range by observing volume, at the bottom
of the chart. When price corrected at the end of June, volume declined. This
suggests a lessening of selling pressure.
Contrast that with volume for the month of July and first part of August as
price rallied. Volume expanded along with the increase of price, and this tells
us that buyers are in the market, bidding price up. The drop in volume for the
last two weeks of August says demand pulled back, and so did price, digesting
the gains.
We entered the analysis as price was breaking out,
Crude Oil – Major Breakout Potential, and have since been in and out on rallies
and breaks, for the record. What is now the most pertinent aspect of the
charts is HOW market activity developed. Notice how price closed on its lows
for four consecutive weeks. When price closes on the low end of a bar, it
indicates that sellers are more dominant than buyers, [otherwise, the close
would have been higher. Simple logic.]. One week could be sellers in control.
Four weeks is a different story.
What has been the result of four weeks of selling effort?
Price has held. Strong hands, [aka smart money], is buying all the selling
without allowing sellers to take the market lower. The reason for this is, if the
market were to go lower, it would weaken the technical structure of the chart
and invite more selling. Easier to keep the market appearing weak without
letting it actually weakening.
Volume continues to support this, as well. Note the strong increase in volume
the first two weeks of October when the breakout occurred. It showed that
buyers were in control and increasing activity. Yes, there are sellers on the
other side of the market, but look at the results: higher prices. Volume has
remained high during the trading range. Again, it says no matter how much
selling there is, buyers are absorbing it, a transfer from weak hands into
strong hands.
Chart 2
A daily chart provides greater detail of what has been transpiring. The first chart
is clean, to give you your own perspective.
Chart 3
We have marked the salient features of what is important to us on the daily
chart. The first point is the horizontal line drawn across the August high to
show where the breakout was confirmed. We entered the market near 76, on
this chart. Take a look at where the trading range has developed…right on
top of the previous trading range below the breakout.
A few points to make: The June and August highs were resistance. Once
price breaks through resistance, it then acts as support, and you can see
from the horizontal line, that is the case. Next, whenever you see a trading
range develop on top of a previous trading range, it has bullish implications.
Price is holding, and is likely to go higher.
We have also drawn in two lines marking the swing high and the current swing
low. Look at how price moved strongly from 66.00 to 82.50. Price covered
16.50 dollars in 18 trading days. Since, price has traded for 22 days and has
only been able to retrace close to 38% of the gain. A sharp rally followed by
a labored correction. This is an indication of strength.
We have also drawn in a dotted line representing a 50% retracement. This is
a general guide to determine the overall strength or weakness of a market. A
strong bull market will hold 50% retracements; a weak bear market will fail to
get above 50% rallies. Here, price is holding well above the 50% level, and
this clearly shows the character of the developing market activity as one of
strength.
The Friday closes have been denoted by small circles, taken from the weekly
chart. The third one is important. The day before was a wide range bar down
on a sharp increase in volume. This could be sellers about to rout the buyers.
Then the third week Friday bar gets printed. It is a small bar, under
mid-range close and also closes under the entire trading range. This is a sign
of weakness, or so it would seem. The fact that there was no more downside
follow-through after such a strong day down the day before makes this bar
suspect. The relative smallness of the range tells us buyers came in to stop
the decline.
The importance of the bar shows that it was a failed probe lower to test what
kind of selling might develop under the trading range. None, as it turns out.
It did accomplish getting weak longs out on stops just under the trading range,
and it may have even invited to short sellers, but that was it. Confirmation of
that observation comes from the rally on the following day.
Looking back, it becomes apparent that the high volume sell-off was a mini-
selling climax where volume expanded and weak shorts exited as strong
hands were buying taking all offers. This is another, subtler form of strength
when a market cannot break.
The remaining trading days end with this past Friday’s retest of the failed
proved a week earlier. The retest bar is similar to last Friday’s low probe:
another small range, volume decreased, [an indication of no selling pressure],
but this time, the decline makes a higher low and a slightly better close.
From all of the observable factors reviewed, the developing story, as told
purely by the market itself, though price and volume generated information,
is unfolding in a very positive fashion, What the trading range does is build
a base from which price can engage in a sustained rally higher, IF it is going
to rally.
IF?
After such a compelling story there is an IF?!
We could always be wrong. The probability remains favorable for the
conditions as described. However, there is never any sure thing or certainty
in any market, no matter how convincing an analysis may be. What no one
can know if how price will develop from this point forward. The market may
continue in a trading range for several more weeks, a distinct possibility. If
it does, and for as long as support holds, then the case will still be made for
higher prices.
All anyone can do is assess the situation and go with the market momentum.
Any change will come about through NEW information which we do not yet
have. One cannot trade or invest on what MIGHT be. Decisions have to have
some basis in fact. We believe this one does.
Long positions were recommended on Monday.
Chart 4
