Thursday Evening 10 June 2010
Our read on this developing market gyration has been on target, starting
with identification of demand buying back on 25 May, and expectations of
a trading range. [See S & P – A Set-Up In The Making, click on
http://bit.ly/9TJdpn]. Thursday’s turnaround rally, when the market
appeared to be on its back for a nine count, was no accident when put into
the context of HOW price had been developing.
If there is one word to describe this market since the huge fall on 6 May,
it would be volatility. It was not uncommon to see the Dow having 100 – 200
day fluctuations, alternating up and down. This kind of volatility is not easy
in which to participate, for the risks of taking a position on either side of the
market was large…just like the rally in the S&P Wednesday, only to see it
give back 26 points by the end of the day. It is for this reason that we
remained on the sidelines as this unpredictable trading range was being
dissected, almost day by day.
What can be said of the market now is that the likelihood of a rally to, and
maybe above 1106 is a distinct possibility. The ease of movement up on
one of the strongest volume rally days, recently, tells us that the daily trend
may turn up, at least for a while. What we need to see now is a weak
reaction as a set-up to go long.
You can see on the daily chart that the low of 25 May has now been
successully retested on Tuesday’s higher swing low, confirmed by today’s
strong rally. This is an example of why we often say to wait for
confirmation of market activity to trade more confidently. We said we
needed to see a rally that held, and it finally happened.
This would be a good time to put what has been developing as a trading
range into the next context for expectations of future developing market
activity. While there may be an opportunity to establish a long position as
this up swing develops, any rally is likely to be short lived. When you see
the kind of volatility of this caliber in a developing trading range, it most
often leads to distribution. Smart money is setting up to get short on rallies
in anticipation of much lower prices in the future. All of this volatile buying
and selling is a smoke screen designed to hide the deft hand of market
movers. We mention this now because of the belief that the bigger moves
to come will be to the downside in the continuation of a bear market.
The reason for making this point is to demonstrate how patterns of market
activity repeat themselves over and over, and what we see as developing
trading range is another phase that is used to continue the shorting of the
market that began back in April. All you have to do is compare the size of
the bars prior to April, as price rallied, to the bars after April, as price declined.
The message is important and one not to be forgotten.
For now, we get to deal with what is, and that is looking for a weak downside
reaction to get long. This is also why it is so important to know the time
frame(s) in which to trade in order to go with the developing momentum.
