Tuesday 5 January 2010
Starting a new year… and the trend remains up…of sorts. True, it is up, but it
continues to show signs of struggle. The largest recent correction occurred after
the October swing high of 1093.75 when price hit 1021, from which a support
trendline is drawn from the mid-July low, extending into the future. It is
apparent that price has respected that support trendline in November and
December. However, there is an important observation to be made. While
price is holding support, it is no longer rallying to the upper channel, as it did
in August, September, and October.
The November high is about mid-way in the channel, while December’s rally
high is not even pulling away from support. This is a sign of a tired trend. The
key word here is trend. It is still up. No matter how tired it may appear, it
continues to make higher highs. The manner in which the highs are being made
is weak, but the trend has not turned down. What we can readily determine from
that is there is no reason to go short, trying to catch a turn. A visual inspection
of the chart shows that the number of profitable shorts in the S&P, and other
indexes, as well, can be counted on one hand.
The lesson? Knowledge of the trend is up, regardless of its current condition.
Do not ignore it and try to pick a top. Top picking is for novices and egoists.
Their record for longevity is unimpressive.
Then, how to best take advantage of the ongoing developing price activity?
When there is an existing channel, but price is unable to get back to the other
line of the channel, it is helpful to draw a line across the recent highs to see how
price reacts to the new line. Remember, what is very useful to know is HOW price
reacts to a support or resistance area or trendline. If it reacts poorly, that is a
message worth noting. If it reacts strongly, we know the area is being respected,
and that, too, is important information.
You can see we drew a new reverse trendline connecting the two highs
designated by the arrow marks. The dotted portion of the line represents the
extension into the future, and one can see that price is not able to overcome
the newer supply line. In fact, price is right at the line as this is being written.
Price appeared to have a key reversal [KR] last Tuesday, 5th bar from the right.
A KR is when there is a new high but a close lower than the previous close, a sign
of weakness and can often change the direction of a trend, both on a minor level
and on a primary level.
Thursday’s 1200 tic decline and low end close, 3rd bar from the right, gave all
appearances of the market going south, especially since the character of the
trend is so weak. Undoubtedly, there were many who saw this and decided to
sell.
Now, we know the trend is up. That is knowledge. The odds of making money
going against the trend is small. That, too, is knowledge. Putting that
knowledge to use tells us not to go short against the trend. For anyone who did
go against the trend, Monday’s 1,800 tic rally was a rude awakening, and a costly
one.
We will be among the first to acknowledge that the trend is weak and almost
begging for a change, but it has not changed, and that is the bottom line.
There will be signs when the trend does change, and there will be an opportunity
to take advantage of those signs. The market never fails to advertise its intent.
It is a matter of exercising patience and heeding the message of present tense
market activity as one’s compass for decision-making.
How does one minimize losses and risk exposure?
Have rules, but more than that, follow them. Rule number one: Knowledge of
the trend.
The “Trend Is Your Friend” sounds so trite to so many. We are guessing that
their market tuition bills, in the form of losses, is greater than they care to
admit. The trend is knowledge. Learn to use it wisely.
