Saturday 20 February 2010
“May you live in interesting times,” Chinese proverb.
Anyone who trades futures lives in interesting times every day. There is
nothing that has not already been seen in the markets, yet we have not been
able to master them. Why not? We are dealing with human emotion. There
is no chart for that. Well, that is not quite true. The futures charts capture the
human element behind all trading, for what else are charts but the collective
results of decision-making from all participants.
“And your point would be?”
Just when it appears that the market has made an important turn, to the
downside, making new highs is a consideration that cannot be ruled out, as
the weekly chart suggests. It will be interesting to see where price is on the
one year anniversary date of last March’s low. It will also be interesting to
see how price reaches whatever level it attains on that date. Maybe it will be
a non-event? One can never know for certain what the future holds in futures.
One does not need to guess, either. Let the charts unfold and reveal their
intent.
While we saw what appeared to be a market turn, a few weeks back, based
on the decline and the attendant volume that came rushing in, we took a
closer look and compared it to the last market “turn,” from June/July of 2009.
The correction, starting in June, lasted five weeks, and the drop was 92 points.
The current correction, for it may be pre-mature to call it a change in trend,
lasted only three weeks, even though the decline was larger, 108 points. In
terms of a percentage move, the first decline in 2009 was marginally greater
than the 2010 decline. On that basis, has there really been any change in
trend? Is this a correction rally to retest the 1048 high, or is this a continuation
of an existing up trend since last March?
The jury is still out.
[We did an article addressing time as a market factor, S & P – Price And Time,
click on http://bit.ly/9l72AJ]
If we do not know for certain, and we do not want to guess, then the best thing
is to gather the facts and reach a conclusion based upon those facts. We
already identified 5 February as a mini-selling climax, S & P – How To Find
Potential Support, [click on http://bit.ly/cNzIIW, scroll past third chart, see third
paragraph.] A selling climax, of whatever degree, is stopping action, at a
minimum, and it is usually trend ending action. In this instance, given its
location, it is not trend ending, so we will defer to it being stopping action.
Price did stop, and there was an ensuing struggle, a few days later. See the
chart from the above article, http://bit.ly/9l72AJ, that shows the battle between
buyers and sellers. It was resolved to the upside, given the current rally.
A 50% retracement is an indication of market rally strength or weakness. The
half-way point from the 1048 highs to 1040 lows is around the 1094 area.
Price closed at 1106 on Friday, so the market is exhibiting relative strength on
this rally, and that information has to be respected. [Take note that we printed
this chart early in the day. The day high reached 1111 and closed near 1106].
Another fact is that Friday’s close was above the highs of the past three weeks,
and that is a sign of relative strength. 1102 – 1108 was previous rally high
resistance, once the 1094 half-way point was exceeded. Price has been trading
at/above this resistance level the past few days. Remember, we always talk
about HOW price reacts to support/resistance areas. Where is the reaction? At
a known point of resistance, where are the sellers to take control and drive price
lower? AWOL. [For our foreign readers, AWOL is a military acronym for Away
WithOut Leave, desertion.]
The biggest piece of information was given earlier, the fact that the recent
decline was not bigger in time or relative price to the previous decline in 2009.
The current price correction has not breached the up trend in price or time.
Add that to the few facts just given, above, and there can be a compelling case
made for price to reach new contract highs!
At his point, the case for a change in trend rests on entry of supply volume
on the decline from the highs, much greater than any recent demand volume.
The 5th bar from the end is called a supply bar, based on the wide range down
accompanied by increased volume, and it becomes a point of resistance, and
the market still has to reckon with this fact.
With these factual observations in mind, what does one do?
Well, we have now placed the market into a context. The current rally is either
going to be a failure retest of the 1048 highs, or it will continue the previous
[existing?] trend to new contract highs. If there is a weak response sell-off
from recent gains, smaller ranges, less volume, we will know sellers are not in
control, and price will go higher. It then becomes a matter of finding an entry
point to get long.
If this is to be a failed retest rally, we should see wider range bars to the
downside, along with increased volume, telling us that sellers are overwhelming
buyers, and price is headed lower. It then becomes a matter of finding en entry
point to get short.
Let the market make that determination for us, omitting any guesswork.
One more observation to make about the stock market. Wherever the high
is, it will take some time to develop the distribution process for price to go
lower. That process will take the form of a sideways move, perhaps for up to
6 months. It could be immediate. It could take longer. Just do not expect
that price may move in a single direction in the months ahead. We could see
a broader trading range as part of the natural distribution process that occurs
in market down turns.
