Thursday  8 October 2009

Price rallied, once again, on Thursday to turn the intra day trend back up and
reaffirm the daily trend as up.  Some may argue up, we say sideways.  There
are too many things wrong with the many technical divergences throughout this
rally since March, and we cannot be acolytes to this Fed-induced show.  From
early on, 3 August, mention was made in a previous article, S & P – A “Muscled”
, that discussed incongruity between the rally and the character of the
market.  Again, on 14 September, when we said tocall a spade a Fed, S & P – Artificial Stimulation

What is missing most in this rally?  Supply and demand.  For sure, there is no
supply coming into this rally, in general, and there is not a lot of demand, either.  The POMO rally, as we like to call it, [Permanent Open Market Operations],
where the Fed feeds funds to banks for the express purpose of supporting the
stock market, accounts for the buying power going into demand.  Beyond, that,
there is very little other source for demand to drive price higher.  Supply is
absent simply because the Street knows what is going on and will not/cannot
stand in the way of such deep pockets.  Short-term short sellers are getting
punished, [the sins for trading against the trend], but that is about it.

The first chart shows the swing highs since June, June being marked “A.”  The
next swing high, “B,” ran for almost two months and gained about 170 points. 
The next, and current swing high, “C,” lasted for less than a month and gained
about 100 points.   The gains in time and price from “C” over “B” are  much
less than the gains from “B” over “A.”  Clearly, the rally has weakend in both
time and price. 

Also note how the August swing low was above the June swing high.  This is
called bullish spacing and indicates overall market strength.  See how the swing
low of 2 October is under the swing high of late August.  There is no bullish
spacing.  Price is not as strong is the message here.

Compare the last four days’ volume on the current rally with the three preceding
days when price was declining.  Volume is greater on the declines than on the
rallies, the exact opposite of a healthy up trend.  Note how the price ranges are
smaller to the upside than on the decline where ease of movement to the
downside, not what one would expect to see in a rally.

Thursday’s high stopped at the retest high from 29 September, and the price
range was relatively small, notable because it occurred at a point of resistance. 
The next test is the high of the failed probe from 23 September at the 1075 level. 
We expect it will hold.

S&P Daily 2 8 Oct 09

On the second chart, you can see how beginning in September, price was
unable to reach the upper part of the trend line, barely staying half-way in the
channel, and then broke the support channel line very decisively on 1 October. 
Altogether, these pieces of market information suggest caution as to the
character and strength of the present tense market.

We are reminded of a similar price structure when the markets were rallying in
the latter part of 2007 to the final highs of the stock market in 2008, the swings
were getting smaller like in the first chart.  There was bullish spacing early in the
rally, then there was none after the last rally in 2007.  There was ample  warning
of market weakness ahead of the 2008 collapse, but no warning as to the
severity of the decline.  This is not to suggest a huge drop may be forthcoming, 
but only to show how market behavior repeats itself, and the warnings should be

We are “heeding.”

Daily S&P 8 Oct 09