Saturday 19 September 2009
Friday’s activity confirms our last article, “The Beginning Of The End?” A few factual observations will make that assessment clearer based on the additional market
activity. Friday’s range is relatively small, and this indicates sellers are present,
keeping the range from making further upside progress, and it also shows how
buyers are not/unable to participate in extending the trend upwards. The fact that
volume declined supports that conclusion. The close on Friday was under the
opening range, and it was lower than Thursday’s close
Sentiment aside, bullish or bearish, the observable facts show a weakening in
demand at new highs when demand should be in total control. What was put
forth just suggests the opposite is true. Add to that another fact: Friday’s close
has created a clustering of closes. What we know of clustered closes is that they
can stop a move, at least temporarily. We highlighted the previous cluster of
closes from the end of August. The market did stop rallying, and it led to the
highest sell-off volume of a few months on 1 September. The stop did turn out to
be temporary, but the message of the market was clear based on an observable
set of facts.
Markets do have corrections, although this move has had very few “normal”
corrections, and in a strong directional move, corrections are temporary, as was the late August one. Remember, a sideways move is also a change in trend. A
change does not have to be from up to down. We have no way of knowing how the market will correct from current levels, but some kind of correction is being
signaled. As was previously noted in “The Beginning Of The End” article from
yesterday, the increased level of volume may be evidence of distribution, a
changing from strong hands to weak-handed buyers who always buy tops. Look
again at how strongly volume increased over the last several trading days. That,
too, is a message from the market.
We are reminded of a Jesse Livermore quip, “Trading is as old as the hills. What
has happened in the past will happen again.” End that with a little Sonny and
Cher: “And the beat goes on!”
The next is a 10 minute chart to get a closer perspective from the inner workings
of market activity. That line, just to the right of the price data in the upper left
corner, is a portion of the upper trend line channel from the daily chart. Price will
often react away from an upper channel line as a measure of being in an
oversold condition…not in every instance, but it is a guage to watch and see HOW
price reacts to it.
To the chart details. At new highs, who is in control? Bulls, or demand, obviously.
Look at the character of the bar when price made new highs for the entire move.
It was a wide-range bar, showing that there was a lot of activity, but the close was
under the open and below mid-range. This bar, regardless of its location being
new highs, goes to the sellers as to who won that battle on that bar.
Two bars later, another wide range bar to the downside on the highest volume for
any bar that day, and a low end close, again. Looks like sellers are exerting some effort up here. Six bars after that, a rally attempt, a retest of the high, fails on
lower volume. The drop in volume indicates a lack of demand. Remember, we are just making factual observations from which a determination as to the character of
the market can be drawn.
The activity from this 10 minute chart is a breakdown of the daily high bar in the
chart above. We mentioned how the smaller range at new highs was a red flag,
and the internal make-up of this day proves why. Firday’s trading day amplifies
the story even more. The initial rally attempt after the opening bell shows a
smaller range, [demand absent at a critical area] and a close at the bottom. A
little trading range has developed as price moves sideways. There was an inability for buyers to step in and regain control as can be seen in the final rally attempt,
marked “retest fails,” on the right of the chart, shortly before the close. Not only
did the rally fail, it went on the break the support trendline, and the level of
volume increased as price declined. Who would you say is in charge here?
Each time a rally high was registered on the 10 minute chart, the next movement
was to the downside with greater ease than the rallies. The gathered facts are
telling a story, and even though the outcome has negative connotations, they
need to be clarified and put in a meaningful perspective. The smaller 10 minute
time frame is not controlling. It can change in a heartbeat, and it must be
measured within the context of larger time frames, like a 60 minute chart, not
shown, but the daily chart is, and the higher the time frame, the more important is the information’s reliability.
The day trend is clearly up. A weekly chart would show an upper range close, the
highest close since the 6 March lows. Both say the trend is up, and price is likely
to go higher. There can be no argument against these stronger, observable facts.
All we have done is disect the most recent market activity, and the most recent
activity is the most important for it represents the latest message from the
market. What it suggests is that all may not be what it seems on the larger time
frames, but the strength required to alter the larger time frames is greater than
what has been presented, to date.
What can be said of the current information is that unlike previous rallies, the high volume attending the last portion of this recent rally has been absent when
compared to other rallies, and volume can be an incredibly strong indication of
change, at times, the singlemost important information.
We catagorize this analysis as a shot across the bow. It is NOT a recommendation to beome a short seller…maybe a seller of long postions, but no more. It is a red flag, and a notice for Buyer Beware. We will continue to put the developing market activity into a context for the coming week. It could very well be there is a new
opportunity developing, and we have plans for that, both for the shorter and the
longer term.
Stay tuned.
