Monday  14 September 2009

Yet another high was registered today, but how to get long?  Is it worth getting
long?  There are so many who kept on buying with impunity in the Fall of 2008, not
for a minute expecting the steep decline that followed.  From a market activity
perspective, there were ample reasons not to be long in the summer of 2008, and
the reasons were not hindsight, at all.  In fact, market activty said to be out from
all longs a few months before the precitptious drop.  That is yesterday’s news, and
one must always deal with what is, and what is present tense, today.

This chart is literally a graphic representation of how it has been near impossible,
from a responsible money management perspective, to be a buyer in what will
undoubtedly be known as a Federal Reserve-induced rally through Permament
Open Market Operations, POMO, the money fueling a market like no money ever has. 

Most every market moves in advances, in an up trend, followed by corrections. 
This is the normal flow of market activity, even from the days of Japanese rice
trading and the beginnings of charting as a record-keeping device.  The S & P chart shows the rally starting from 3 September.  Where, from a money management
perspective would one buy?  It is axiomatic to never chase a market.  The risks
are too great.  Where  was there even the slightest pull-back to be a buyer?  There was none!  If one has rules for when and where to take a position, they have to be followed.  If the market does not offer an opportunity to put the rules to use, then
no position can be taken in the market, long or short.

When a correction did occur, look at the magnitude of it.  The correction retraced
most of the previous advance.  Anyone who was a buyer during the advance had
little to show, and maybe even losses.  A market that moves sideways, as did the
S & P, without giving up a lot of ground gained is a positive indication for
continuation, especially when there were NO signs of supply entering the picture. 
Without supply, a market will continue higher…Supply v Demand 101.

When the market did correct, starting in earnest on 1 September, the volume on
the decline was the strongest down volume in months!  Yet, there was little to show for it.  Price entered a small trading range for a few days.  After such a strong
move down and an inabiity to rally, expectations were for more downside, but new
life sprang into the market, and price has been up for eight straight trading days.

One could not be a buyer on the initial rally from the September low because it
looked like a normal retest of the strong drop from 1 September, offering a
potential to go short.  Buying into a potential resistance is not a prudent move. 
Well, resistance turn out to be non-existent, but once it was confirmed, where does one buy?  1020?  1025? 1030?  Anywhere in between?  The risk in doing so, using
a stop, is the previous low back under the 1000 level.  The risk is defined, but the
reward is unknown.

Will price stop again at 1036?   If it does, buying, after the resistance showed to
be a non-factor, made the risk/reward an even proposition.  Not acceptable odds
from a money management perspective.  But the market keeps on going up!  Just buy!

Were it that easy.  Relax the rules for that situation, and there are no more rules
to maintain.  Discipline is paramont for success in trading.  Better to miss a
perceived opportunity, particularly one from the 20/20 bleachers, than to jump in
and experience a loss.  The loss is less important than the abdication of
responsible trading discipline, for that is too great a loss under any circumstance. 
The break from the 1037 area almost uncorrected to the 992 area shows what can
happen at any given time, and in a market that was so “easy to buy.”

We mention a Fed-induced rally because the market has shown a decided absence of normal corrections, while at the same time, giving signs of divergence that
would call for a correction in so many instances, corrections that did not occur when
reasonably expected, based on past experiences.  Interfering with free market
activity for politcal gain in an attempt to make the economy look good will have
consequences more severe that were the markets left to find their own price levels. 

There is no lesson to be given here, other than to always act responsibly and
adhere to the game plan that has brought success in the past.  Even today, near
the close, price activity was at the higher volume levels for the day, and price
showed selling at the highs, but that also happened on Friday.  We have already
described Friday’s small range implication, but the “market” shrugged it off.

Then again, we cannot dismiss Thursday, the 17th, either….As Above, So Below. 

Buying new highs in the past has led to sideways movements, and we “think”
another may ensue.  If it  does, it will be a shorter gain from the previous two
swing highs, and that indicates a warning.  So many warnings, but no causes for
alarm.  We are reminded of the boy who cried “Wolf” too many times to be
believed.  “Buy” seems to have the same ring to it, these days.  Even if totally
wrong, our powder is still dry, and there are always better defined opportunities.

Still waiting.

S & P 14 Sep 09