Saturday 23 January 2010
We have written extensively on the difference between every day selling activity
that occurs as a matter of course, and supply selling that leads to a change in
trend. We noted on many occasions that when supply enters the market, it is
differentiated from every day selling by increased volume and violation of
previous support.
On Thursday, when the market sold off on a larger price spread bar and
increased volume, it had not yet confirmed a violation of previous support.
In fact, price closed right at the top of the October-December trading range, an
area of support. We had seen quite a few sell-offs like that in the past only to
see price turn around and rally next day, or sometimes two. A perfect example
was from the previous Friday, 15 January, when price sold off but held support,
and then rallied to erase all the losses on the very next day. That prompted
us to write the article, S & P – What Makes This Day Any Different? In the very
last paragraph, it was acknowledged that we did not see any supply: [click on
http://bit.ly/7Ugkde]
“We do not see any supply. That could change on Monday, or a week
from now, or longer. One cannot know this in advance, so observing
market behavior every day for signs of change is all that one can do.
When change does come, there will be no guessing.”
It is always true that one cannot know what will happen, in advance. All we can
do is observe present tense market activity to get confirmation of what may
occur, based on previous direction and activity. As we knew to be the case and
which is why we concluded with the very last sentence, “When change [in the
form of supply] does come, there will be no guessing.”
Where Thursday could still pose a question, and a very valid one based on
previous results, Friday made it resoundingly clear that supply selling was
present. One sell-off day does not a trend change make. Two large sell-off
days, like Thursday and Friday, removes all guessing. In just two days, price
erased the previous month’s rally activity, breaking support and on increased
volume, the classic elements of supply enetering the market.
In that same article, we also mentioned, two paragraphs earlier, how this has
not been an easy market. All that has been missing in this rally, since last
March, and particuarly in the past few trading months, has been supply.
Demand had been weak, but selling activity was even weaker. The past two
trading days has changed all of that and leaves little room for doubt that rallies
can now be sold, for buyers have clearly lost control to aggressive selling that
acted with impunity in driving price down sharply.
From Thursday’s activity, we were looking for a weak rally to initiate short
positions. There was none. Friday quickly continued the activity of Thursday,
as price cascaded down in waterfall fashion, leaving no opportunity to sell a
weak rally. Our rules for trading are specific and do not allow for “jumping in”
on a moving train. The risk in placing a stop, based on market activity,
becomes as great as the last decline, and it does not make sound money
management sense.
We have expressed reticence in the past about being long this market that
demonstrated weak demand. Once supply entered, it would be damaging, and
it made no sense to be exposed to that kind of risk. Lest anyone who was long
going into the Fall of 2007 that led to the fall that erased a ton of equity, we
were content to be more conservative and miss out on the upside in order to
not be in the way of what could follow.
Just last Wednesday, we acknolwedged that being on the sidelines is
sometimes the best place to be. S & P – Weak Demand, No Supply, in the last
sentence, [click on http://bit.ly/5goLZK]. Resistance is clearly at the 1127 area,
with smaller levels in between. Now we get to judge the character of ensuing
rallies in order to take advantage of what appears to be the long-awaited
change of trend.
