Saturday 26 September 2009
There are many important lessons to be learned about the markets, some are
more important than others. One that is often overlooked by many is to wait for
confirmation before acting. There have been some key indications of a possible
change in market direction, at least temporarily, and the current “correction” is but
one in a string of others that failed to follow through on the downside as price
subsequently rallied to new highs.
Is this one any different?
We believe so, but until there is confirmation, we will not take short positions,
[shorter term time frames excepted]. What makes this situation a little different
is the called high from the 17th, still in play. The SPY chart shows a double top
where the S &P futures shows a failed probe higher that began three days ago,
Wednesday. The sell-off is classical in that it retested a previous high, [the 17th]
and failed as price declined on increased volume. The increased volume indicates
sellers present, overcoming all buying efforts.
[Even though a call for a high of the 17th was made, there has yet to be
confirmation, 10 days later.]
What makes this observation more cogent that previous sell-off attempts is that it
occurred AFTER the large volume activity starting on 9 September and culminating
the 17th. We have previously mentioned that this was likley distribution: strong
hands unloading and selling to weak hands. There is a flow in the markets, and
one has to be able to make the connections as to the significance. Remember,
there were failed sell-offs starting on 1 July and 1 September, each followed by
higher prices. If one did not wait for confirmation that a correction would be longer lasting, going short after either event led to losses. It is for that reason that we
say, “Wait for confirmation,” before taking a stance to the down side.
We have given reasons why we believe “this time it’s different,” but beyond the
stage-setting, there is no confirmation that says the current correction will be
greater than it already is, even though momentum suggests it will. [Suggestion is
not proven fact.] You can see from the chart that Friday’s low, 1036.25, is just
above the last swing high, 1034.25, and also above a support low at 1025.50. The low and close are also sitting on a support trendline off the July-September lows.
In order for there to be confirmation, the last swing low needs to be exceeded, and the extent of the number of points in the correction should exceed previous
corrections, as well. Neither has occurred, yet
One observation we made on a 120 minute intra day chart was that at the lows of
the 1 September decline, the bars that followd showed mid-range to higher closes
on many of the bars. In contrast, most of the closes after Friday’s decline were
below mid-range on the bars. A close under mid-range indicates sellers won the
“battle of the bar,” and it was in keeping with the character of the decline, whereas
the September low showed a change in character in that buyers were winning the
“battle of the bars.” Sometimes these little details are the tipping clues in reading market activity.
We also noted that volume picked up in the last 30 minutes of trading. Making
this point demonstrates the necessity of waiting for confirmation, even on a 10
minute bar time frame. What was the significance of that observation? More
selling came in at the lows near the close is one interpretation, and one that is in
keeping with the tenor of the day. However, that increased volume did not, did not take out the low that preceded the last 30 minutes of trade. Was that the
beginning of buying coming in, “undetected” by most market participants, as a
prelude to a rally on Monday, thus trapping all the sellers at the bottom of the
range?
This is why reading present tense market activity, in all times frames, is so
necessary. Missing important clues can be detrimental to trading tactics. Also,
Friday’s range was the smallest in this decline which shows some buying was
present to prevent the range from extending lower. Had the range gone lower and
closed under 1036, it would have shown greater technical damage in the inability of the support trendline to hold and to also trade under the August 1034 swing high.
This clearer read would have given added ammunition for the bears to press as
much as possible.
[If smart money is still on the long side, and/or has not finished distributing their
long positions a process which takes time, then they purposefully defended the
support trendline and kept price above the mentioned support points. Allowing
greater technical damage would have made defending their position much harder.
Smart money does not want the public to know their intent, and this is why the
read of market activity will detect what smart money is doing. Most people pay
attention to the news. That is a mistake. We choose to only “follow the tape.”]
What to do?
Simple. Wait for confirmation. If the market is turning to go lower, there will be
evidence of a weak rally in which to take a short position with knolwedge of a
change in the daily trend. This is why knowing the trend is the most important
piece of market information. It gives an edge in making trade decisions that
harmonize with the trend direction. If the “correction” fails to gain traction, as it
did on 1 September, there will be a buy set-up in which to go long and be in
harmony with this Fed-induced up trend.
Either way, the market will provide the factual clues as described, and making
buy/sell decisions will become easier, with an edge. You always want an edge in
trading.
Always.
