Tuesday Evening 17 November 2009
Charts can be like clouds, at times, as unlikely a comparison as it may
seem. Yet, the same chart can be interpreted by so many people in a
variety of ways, it would make one wonder what validity can be attached
to a chart?
Take a look below, and what do you see? [Ignore the comments]
Then read on.
Lets us deal with factual observations in order to draw some kind of
reasonable conclusions derived from the facts gleaned. First and
foremost? The trend, of course. The single most important piece of
information. Why? It identifies the prevailing path of least resistance,
and that is where money can be made, going with the flow.
The trend is up! How do we know for sure? The highs are higher and the
lows are higher. A few days ago, we viewed the trend as sideways, after a
failed upside probe five bars ago, followed by a wide range bar down on
increased volume. Since, price has made new highs, and the arrow has to
point up, based on the observable facts. Of this, there can be no dispute.
This brings up a minor point. There does not always have to be a trend. Sometimes, it can be sideways or too difficult to determine. That is
important information, as well. Leave them alone, and look for a market
that has a defined trend. Trading with a trend gives an immediate edge.
Because the trend is up, we know that half the decision-making has been
eliminated…buying or selling. The only position in the time frame chosen
for analysis, in an up trend, is to be long, never short against the trend.
[Take a look at the Natural Gas chart from an article written earlier today
to see why one should never go against the trend.
Natural Gas – A Low-Risk Short-Term Trade. Anyone foolish enough to buy
that on the way down was inviting margin calls and losses.]
Wait! Didn’t that article say we recommended a long position? As a matter
of fact, yes, but we did so based upon an intra day time frame in which the
trend was NOT down. Like we repeat over and over, know the trend in the
time frame one is trading, and the next higher time frame, in addition.
Back to the S&P chart.
There are some other facts to be gleaned. The important ones have been
noted on the chart. The swing highs, or upward thrusts, are getting shorter.
The horizontal line drawn across the July high is greater than the next
higher thrust in September, where another horizontal line has been drawn.
The thrust high in October made less upside progress, and we do not yet
know where the November high will be. From these observable facts, we
can say that the trend, while up, is weakening.
What else do you see?
The declines from each successive high are getting deeper. The decline
from the September high retraced just over 50% from the early September
swing low. The decline from the October high retraced over 75% of the
early October swing low. More facts that say that the trend is weakening.
Notice the volume during the first half of September rally. It was the highest
volume up to that point. In the second half of September, on the decline in
price, volume dropped, a normal reaction for an uptrending market. But, in
the second half of October, on the steep decline, [over 75%], volume
increased, saying sellers were winning the battle. The duration in number
of days down was also greater than the number of days down in the
September reaction low. Volume has remained low during the current
November rally. All facts.
What can we conclude?
The trend is up, but it has weakened. A weak trend is susceptible to
selling entering into the market. Speaking of selling, it has been absent.
Just when it looked like it was game over at the end of October, when
sellers had buyers on the ropes, buyers were doing a rope-a-dope and
came back, although one can say definitely not with a flourish.
To buy or not to buy, that is the question? We have not been buyers of this
rally, or even the preceding rallies shown in this S&P chart. The facts keep
getting in the way. Plus, before we were bothered by the POMO effect. The
first reason was given in early August, S & P – A “Muscled” Market, and then
we could not shake the POMO effect, [Permanent Open Market Operations],
S & P – Will POMO Win Again?
We cannot subscribe to the long side, based on factual observations and
inferences drawn therefrom. Nor can we forget the similarities of the
shortening of the swing thrusts back in the Fall of 2007 that led to the Fall
of this early century. Trends to end, and we have been waiting for the end
of this one.
It would seems we can all agree on the facts contained within the chart.
Now there are probably a lot of varying opinions on what to do about those
facts.
We certainly cleared that up?! [At least for our purposes.]
