Sunday 11 July 2010
The past two day’s high end of rally look tenuous. Two things jump out on the
daily chart. One: the last two bars kept getting smaller. What does that mean?
Both a lack of sellers and a lack of buyers, but because the closes are upper end
of each bar, the buyers remain in control, more by default, however.
Two: Look how volume keeps dropping as price rallies. Buyers have won the
battle, but the war is far from over. The smaller bars reflect an inability of buyers
to extend price higher, especially in the absence of any selling. Not a good sign
for longs.
As an aside, who would be doing the selling, anyway? This has been a politically
driven rally, fueled by the Fed via POMO, as we have stated so many times
before. [POMO = Permanent Open Market Operations] The only sellers would be
the Wall Street firms acting somewhat in concert with Washington “wishes” to keep
a positive spin on a very weak market. This accounts for the lack of selling, and it
demonstrates exactly how little buying interest there is in the absence of active
sellers.
There is one thing, and one thing only that drives a market higher, and that is
demand. Demand is recognized by increased volume and widening bars on rallys.
We see the opposite. Caveat emptor.
The 60 minute chart offers a supporting role.
Volume on the 8th is less than that on the 6th and 7th. Volume on the 9th is
even smaller. This chart shows overnight trade, so the 8 standout volume bars
each day reflect day session activity. Compare the size of the price bars for each
succeeding day. They get smaller and smaller as well, particularly on Friday, the
9th, and it is the last trading day of the week that tells the story behind the
character of the rally.
Price was near a resistance area and the half-way point. Thursday’s range and
volume were small, so eager shorts see this and decide it is an opportunity to
sell. [We know otherwise and will address why in a minute]. Sellers get short,
but there is no concerted selling going on, and what buying there is is enough to
keep the market rallying, little by little. The weak shorts are not making money,
so they cover, and the way to cover is to buy back their position(s). That buying,
in the form of short-covering, keeps the rally going. This kind of activity feeds
on itself: sell and cover, sell again and cover again, and the rally continues for
this reason on very little demand buying.
Why do we know it is not time to go short, even when there are apparent signs
of weakness in the quality of the rally? There has been no ending activity, no
indication that sellers are entering the market in strong numbers. The reason
why we know is because there is no wide bar that closes at the lower end of the
range with increased volume. That would be a show of weakness and a sign that
sellers are gaining control and may force a decline. This would trap weak buyers
and upset the weak sellers for not holding on to their positions.
With little demand, why buy. With no apparent supply, why sell?
Let the market play itself out. The signs to take action will be apparent.
