Saturday 19 December 2009
For as much as it looked like the S&P was heading lower, it refuses to give
up the protection of the current trading range. The short positions we
recommended were scratched. After two days of effort, they were not showing
any profit due to the poor trade location, which happened to be in the middle
of the month long range.
The review of six different time frames,
S & P – A Domino Effect In The Making?, was helpful to keep in mind that the
higher time frames are still showing strength, and not to let the smaller time
frames, like the daily and intra day be too controlling for decision-making as
to immediate expectations for trend movement.
The horizontal lines frame the current trading range that started in November.
The up-sloping trendline shows how the trend continues to remain above it.
We have already covered how the upward thrusts have been getting shorter, a
sign of weakening, S & P – Appearances Can Be Deceiving. It remains more of
the same. What we know for certain is that it will not remain the same, and
when a change occurs, it will auger a substantial move.
Let us qualify that conclusion. If price breaks out to the upside, we are not of
the mind that a move higher can/will be sustained. The Federal Reserve is
bankrupting itself; it already did so to the country back in 1933. Even if it
chooses to continue pumping fiat paper into the market, more and more people
are willing to recognize that the “emperor is wearing no clothes.” We see the
upside as limited, and we fully expect the possibility of yet another failed upside
probe if price does rally once again.
What we do see is the higher probability of a 100 point S&P decline, nearer to
the 1007 level. That target will be adjusted if and as price drops. A point and
figure calculation defines how low price can potentially go from current levels.
What has been missing in this market is supply selling. We have defined supply
selling before. It is when price declines with ease of movement down, evidenced
by wider bars on substantially increased volume, and previous support areas are violated. We differentiate supply selling from the word “selling” used by itself,
for selling goes on all the time in the course of daily activity, but bars and volume
may not increase in size as a consequence.
We placed an arrow at the high volume day, and another arrow that reflects the
price activity that resulted. Volume is relative to the activity surrounding it. You
can see that November’s volume kept getting smaller. The 4 December Friday’s
volume spike stands out as a substantial increase, relative to the past few weeks
of trading. It also marks the high of the current rally and trading range.
High volume spike often are a transfer of risk from weak hands into strong. In
this instance, strong hands are selling into weak-handed holders. Note how the
level of volume has held steadily for the past few weeks, but price has not been
able to extend higher with that increased effort. Smart money likes to hide
what it is doing, but we contend that their activity HAS to show up in volume
because they move such big numbers of contacts that need to be distributed
over time.
When price declined 75 S&P points, during the last half of October, the level of
volume was about what it has been right now. We view this as part of the
distribution process, smart money distributing their long positions into the hands
of “other” buyers that lack staying power. This is how markets work, and it is
how markets have worked on exchanges for over 100 years.
What we are seeing are the final stages of this politically-driven, Fed-fed rally
that is doomed to fail, much like the doomed-to-fail policies of pumping trillions
of fiat printed currency to prop up the same faltering institutions that were the
cause of this financial disaster. The shell game is fast cracking.
The trading range “balance” will eventually be broken, and an imbalance will
ensue. It always does. It is for these reasons we gave the projections above
as a target. The market never lies. It can be manipulated for only so long,
and history is replete with market bubbles, from tulips to houses. Not even the
devastating policies of greedy central banks around the world can hide their folly.
This article is as much editorial comment as it is technical, but the comments
are made to better understand why the technical picture has been so bent out
of shape, as revealed in the distorted action between price and volume
thoughout this rally.
The trading range is alive and well, and price will not get very far until it breaks
free of it.
