Tuesday 6 October 2009
The higher end close on Monday argued for a higher high on Tuesday, and themarket did not disappoint. Price gapped higher, using the day session data, and rallied to anticipated resistance, first at the 50% mark, which offered no resistance, and then to the 1052 area, where there was the start of a high volume sell-off from 1 October. Just above that was a channel line coming down from the highs to offer more resistance. Price exceeded them all, but not by much.
We prefer to use only day session data once the market opens, however the daily bars also show after hours trading. The after hours high from the 1 October sell-off was 1056. Tuesday’s high was 1056.75, a tiny “failed probe” of just .75 of a tic, or a small “double top,” of sorts, not to stretch the issue too much. Whatever it was, price failed there today and began to sell-off.
The mid-September high volume, which we characterized as distribution back on19 September in our article, S & P – The Beginning Of The End? , continues to play a role in putting market activity into a perspective. Reading market activity isan art, and reading volume is yet another, more difficult form for volume is utilized by smart money to “hide” the intent of their operations. Our premise in assessing that increased volume activity as distribution meant that smart money was unloading, from strong hands into weak hands, but the use of manipulating price and volume to cover tracks is not a blatant effort, even in hindsight, for smart money does not want to leave a roadmap for future operations, even though the game is repeated over and over again.
It is like this: How would you catch a bear? Most people go hunting and look forsigns, especially bear tracks, and then they follow the tracks to find the bear. That has its perils because bears are pretty smart, and dangerous. A better way would be to follow the tracks, but backwards leading to the bear’s den. Once you locate the den, just sit there and wait for the bear to come back. This is why smart money does not want to leave “tracks” in their volume and price activity. However, every purchase and sale is recorded and shows up in price and volume behavior, [a clue to why we focus strictly on market activity…in the same form, price and volume!] If one learns to follow their tracks, smart money’s intent on
driving a market directionally, or even in a trading range, can be detected and followed, gaining an edge.
Back to our little observation about volume for the past few days. [The “g” did not print in full in the identifying the failed probe “high” on the daily chart below, and we did not point a line to the high for clarity of reference, as an aside.] Look at where volume picked up again on the chart, the 3rd, 4th, and 5th bars from the last volume bar of today. The difference between this volume and the September
volume was that it occurred while price was selling off, telling us that sellers were in control and buyers could not stem the onslaught.
If the September volume were demand, or accumulation, then price, starting from five days ago, could not have sold off so easily on strong volume. The logic is clear once you understand the context. Then look at the wider ranges of the sell-off bars against the smaller ranges of the buy bars as price was being pushed up by the Fed operatives. The ease of movement is clearly to the downside, based on these factual observations and putting them into a market activity read.
Next, the 2nd bar from the end was a rally day, Monday, but look how volume dropped off significantly. This tells us the rally was based on a lack of sellers, and not a demand rally driven by buyers, an important point because it speaks to market weakness to the upside even though abolute price was higher. The daily chart was taken an hour and a half before the close so the total volume is not shown accurately, but the “story” is already evident.
Switching to a 10 minute chart, we see the market in finer detail to make an assessment. Go back to the daily chart and look at the top channel line drawn from the high of 23 September and the highs of the 29th and 30th, continuing into the future. We mentioned earlier the channel line being resistance. You can see how price respected that line when Tuesday’s high was formed. The high you see on the daily chart, the last bar, is the high shown on the 10 min chart and labeled “Key Reversal Restest High” A key reversal is when price makes a higher high but closes lower that the previous bar’s close, and it suggests at least a correction. We see it as important that a weak bar would show up as the high and
at an exact point of resistance. It is a very small piece of the puzzle, but little pieces add up.
Price went sideways for the next hour and then sold off on wider range bars down to the 1042 area low. We opted to get short based on the intra day trend being down, and price potentially failing at a point of resistance. Look at the bar from 11:30. It has a wide range with a low end close, and it erased the rally attempted activity from the preceding 8 bars. One bar erasing 8 can be important. Once price continued lower, that was our sign that selling was entering the market and time to get short if the down trend were to resume.
From the low, price rallied back to 1052, retesting the early morning high and forming yet another key reversal retest bar of the first retest at 1056. From the right hand side, look at bars 4, 5, and 6 that rallied to form the retest, and check the volume as price rallied. Volume decreased…a lack of buying effort. Then compare that to the last three bars that sold off, and how volume increased, a sign of sellers willing to increase their activity.
Cutting it even finer, the 2nd volume bar from the end was one of the highest volume bars since early morning. “But price rallied!” you observe. True, but what was the payoff for the buying effort? Did price advance to higher ground?
None and no.
Then we say sellers were meeting the increased buying efforts willingly in the belief that price was about to fail and go lower, [Wednesday], so “Welcome buyers. How much do you want?” We do not mean to sound cavalier about this, because the trade can get stopped out for a loss, and we know it. However,
one always takes a risk in any position. What we endeavor to do here is explain how a trade can develop, and if properly assessed, reduce risk exposure and put the odds of probability of a favorable outcome on our side.
Will the trade make money? We do not know for the outcome of any given trade is random and cannot be known in advance. But if we pick ten trades using this kind of reasoned analysis, we have an edge and the odds more in our favor.
Having an edge is good.
[Short from 1051.50]