Thursday 6 May 2010
It has been an arduous rally in stocks since the March 2009 low, but we are of
the mind that it is over, done, finished. It cannot be repeated enough times:
Knowledge of the trend in which you are trading is the most important piece of
information you can have. The recent signs of weakness, evident by the wide
range, heavier volume down days, [see S & P – Know When To Hold’em , first
chart] tells us that the activity of the past several weeks has been a phase of
distribution. Distribution is where smart money, [strong hands] is liquidating
and establishing short positions, at the same time.
Distribution was also discussed in S & P – Plan A Or Plan B? , second paragraph,
and other references within that article mention distribution. Markets do move
in somewhat of an organized fashion, when you know what the road map may
look like, just as we have been laying it out.
We get confirmation that distribution is completed when the previous supports
have been broken on a strong move, wide range bar(s) down on increased
volume. Can last Monday and Tuesday give a clearer example of that process,
which was then confirmed by yesterday’s breaking of support? A great, great
example.
Now, we are looking for a retest that will show evidence of a weak rally, and
once that rally ends, it will be a signal to get short with the expectation of a
markdown phase to follow. This is where money can be made through
strategic positioning. It is why we say there is no more guesswork from here.
No one can know in advance where a weak rally will end, but we can do our
homework and have a few places where a rally is likely to fail. 1075 is where
yesterday’s high was, and that would be the first area to watch how price
responds to it. If we take a measure from the final high to yesterday’s low,
a 50% retracement is around the 1185 area, using day session data, and the
1190 area where support was broken is near a supply trend line is another
point to monitor price action, in fact, it would be the most ideal place for a
weak rally to fail.
It is always possible that price will not stop at any of the above points, and that
is okay. If price rallies right through these areas, the price action will show
strength, not weakness, and we have been saying to look for a weak rally only.
This means we will not automatically go short just because price reaches the
lower target(s). That would be foolish. There HAS to be a reason for taking a
position in the market, and there has to be an indicator that says a short
position is warranted. This is not a mechanical process we are discussing, but
one based on present tense market activity providing information generated by
the market itself. There is no better or more reliable source!
We know in advance what we want to do, which is go short, and we also have a
few areas selected as a likely place where a weak rally may fail. That removes
any guesswork, would you not agree? It makes trading so much easier, [not
that trading is easy], than not having a predetermined plan in place. We also
know NOT to go short if there is no indication of weakness. All that is left to be
done is execute the plan!
There is also the possibility for another low, but downside progress has been
shortening, and price is still at an oversold area. Rallies are to be expected as
normal market activity.
Back to the trend. What we have described is a turning point in the daily trend.
The intra day trends have been down, as we have been saying, back on 28 April,
and also mentioning that the daily trend may be in trouble,
[see S & P – Great Example Of Changing Information]. The weekly trend is
showing some possibility of a change, not yet confirmed, much like we
mentioned about the daily trend possibly changing, back then. It takes time to
turn higher time frame trends. It is a process that requires patience. Just be
aware that the weekly trend is still considered up. If the analysis of the daily
trend changing is correct, the weekly will eventually give way, as well. It is always
a matter of being aware of what is going on in the various time frames.
We have our plan to only position from the short side, and it is announced in
advance. We can be wrong at any time, but until the market says otherwise,
the roadmap unfolds.
