Wednesday 30 December 2009
Time to review in preparation for the new year. We start with an annual chart,
without comment, asking the question, can anything be learned from such a
chart? Few market participants ever look beyond a daily or weekly chart, and
even fewer ever view an annual one. There is actually a lot of information that
can be gleaned from yearly charts, and they help put a market into a
context…important for identifying trends and developing expectations.
We drew in one simple little line that shows where price has stopped, but that
line is extrinsic to the rally. What does this chart suggest to you, if anything?
Here are our observations. Starting with that little horizontal line mentioned
above, it is a 50% retracement between the market high and low. Mention of
this point has been made in the past. A half-way retracement can often act as
resistance in a down market and support in an up market. If price is unable to
rally above a half-way point, it indicates weakness, and the trend should
resume. What is the trend here?
Good question.
Price made a lower swing low in 2008 and 2009, under the previous low of
2002. A lower swing low,following a failed retest high, turns the overall trend
down. If the trend is identified as down, price stopping at the 50%
retracement level becomes a more significant piece of information. Keep in
mind that 50% is an area, not an absolute price. S & P could still go a little
higher, over the 50% area, but if it does so in a weak manner, the market is
providing an important message.
Note is made of the key reversal high established in January of 2000.
[A key reversal is a higher high, followed by a close under the previous bar,
in this instance.] This one led to two more years of a substantial decline,
establishing a low at S&P 767 in January 2003.
There was a failed retest in January 2007. [A theme of Januarys, it seems.]
Note how the close of that bar is in the middle, after making a slightly new
high. [Jan 03 high = 1574, Jan 07 high = 1586]. This is a huge red flag.
Why?
Any time a market makes a marginal new high and closes mid-range on the
bar, it says that there were sellers present at the highs, otherwise, the close
would have been higher. The inability to go much over the high of four years
earlier tells us that there was no new buying appetite or stops to continue the
price drive higher. It was a shot across the bow for those hoping to see a
stronger stock market.
There was no way to know to what extent the market might decline, but there
was advance warning that a decline was likely. We often say how the market is
the best source of information, and it advertises its intent. Here is a great
example. It was clear in January 2003, and it was clear again in January 2007.
Ignore larger time frame charts at one’s own peril.
A quarterly chart provides more detail than does an annual. The bar
approaching the same 50% retracement point is decidedly smaller. The reason
why it is smaller is because selling efforts are meeting the efforts of buyers and
preventing the range from extending higher. Interesting that a smaller range
just happens to occur at a 50% point. As in life, there are no accidents in the
market.
Volume has also declined, and this tells us that buyers are not that strong in
number…less of a following as price goes higher. A red flag of its own. [A red
flag is a warning to be alert for potential change.]
The weekly chart fills in even more detail, as we go down in time frames.
The six week cluster of closes indicates an inability of the market to sustain a
directional move. This is occurring just under that 50% area identified on the
annual chart, carried forward. Of significant importance is the added observation
of the increased volume during the last three weeks of the clustering. Volume
is energy, effort. There was very little reward produced for the additional energy
expended…another market message…another red flag. We addressed the
importance of a diminishing effort in the market in a previous article,
S & P – Appearances Can Be Deceiving.
In the last two weeks of the year, price has made new highs, but the effort
has been a tired one. The market is letting us know, well in advance, that
the current advance is in trouble. We have warned of such before:
S & P – Trading Ranges And Bubbles.
Warnings, red flags…they are signs to be aware of potential change. The
“change,” always remains “potential” until the time that confirming indications
take hold. To date, there have not been any, but do not get lulled into
illusions of higher prices as a “sign of strength.” Always be aware of HOW price
has been going higher.
Summation follows.
The annual chart is closing at the highs. This tells us to expect a higher high
over S & P 1128 in 2010. How much higher over 1128 is unknown? 1130 would
fulfill the expectation of a new high just as much as 1200, or more. The 50%
area is just a guide, and for now, it is issuing warnings. We did not include a
daily chart that would show more of the same, a struggle as price limps higher.
What is missing from this scenario is the confirmation to validate the red flags,
and the only thing that will give substance to the warnings is supply…supply in
the form of strong selling, [increased volume] that makes a lower swing low. A
move under S&P 1085 -1080 , made with increased volume and wider range bars
will seal the deal. There will be earlier signs, first showing up on a 60 minute
chart, translating to the daily, etc, but until they happen, the struggle upwards
will continue.
Just like the key reversal and failed retest shwon on the annual chart provided
warnings for change, and change did occur, we see no reason for ignoring the
current signs, and for sure, no reason to jump ahead of them. Patience will pay
off. The new year awaits. So do we.
