Monday 1 February 2010
Oh, how quickly things change! The last two weeks wiped out efforts from the
last three months. This is what can happen when supply enters a market
“dominated” by weak demand. We have talked about this specific issue, [lack
of demand, no supply], for a few months and our reluctance to be long such a
market. We also introduced you to the Nasdaq- S&P E-Mini spread as a leading
indicator and how once 730 was broken, it would change the market, Nas-S&P E-
Mini Spread Sending Mixed Signal, [click on http://bit.ly/6r1WZV]. The market
collapsed along with the spread, taking no prisoners.
Starting a new month, it is appropriate to look at a monthly chart, particularly
because they are more controlling when it comes to defining the major trend.
January is the largest reversal month since the March 2009 lows. It formed an
Outside Key Reversal, [OKR], which is a new high, a lower low, and a lower close.
Two aspects about this OKR worth noting.
Firstly, it followed the smallest monthly bar, also since the March 2009 low.
Any time you see a small range bar, it can be a sign of reversal. In this
instance, the smallness of the range reflected the market’s inability to extend
the range higher, also a sign that sellers were preventing buyers’ efforts to rally
more.
Secondly, the close of January was under the low of the entire range of
December, a very bearish sign. We often remark that anything can happen
and how it is impossible to know how a market will respond in any given
circumstance. That was proven by the cascading drop in price that offered no
corrective rally from which to initiate a low risk sale. Once price began to sell
off from the high, the trading range still had to be respected. What transpired
was the unexpected in price dropping with impunity, cutting through not only the
smaller trading range, but also through the November-December range as well.
It is clear from the daily chart that the 21st and 22nd of January marked when
supply overcame demand, [7th and 8th bars from the end]. The broken
support of the 1125 area is usually retested. This break has not been usual,
and there was no retest. In fact, the closest the market came to a retest was
the brief intra day rally to 1103.50 last Thursday, [3rd bar from the end].
Price has now retraced to two important areas: 1. when there was a demand
rally on 9 November, and 2. the Dubai sell-off lows, which also retested the
9 November demand rally, both becoming a support area extending into the
future, now the present. The current monthly March contract is holding just
above support, whereas a monthly continuation would show last Thursday’s
decline pretty much reached the support line.
We did not extend that horizontal support bar to the left, but you can see that
the present sell-off low also has stopped at the September highs….[remember,
there are no accidents].
There is no ending action to this decline, so the strategy is to sell rallies that
retest the 1104 highs, depending on HOW price approaches resistance. The
“how” will provide the clues as to if and when. If rallies do not reach 1104,
there should be a sign(s) of weakness for that, too.
