Thursday 28 January 2010
Price finally found some initial support to stem the steep sell-off from the
1147 highs. The trading range lows from November-December, 1078 area,
stopped price at 1078.50 in response to the FOMC announcement. The
horizontal support line that shows the previous two month’s support was
extended into the future, the broken line portion, and it shows the value of
knowing where these areas are once approached again.
The validity of that past support holding was demonstrated by the high end
close of yesterday’s bar and confirmed by the pick-up in volume. It was most
likely short-covering after the 50 point decline. We often state that what is
important is HOW a market responds to anticipated support/resistance points,
and the ability to rally from the support low to close at new highs for the day
addresses the HOW in a relatively strong way. It is worth noting that the close
was higher than the previous three trading day closes, adding to the possibility
of a reaction rally.
We indicated the 50% retracement area, around 1112. Depending on how
close any rally comes to, or exceeds, the 50% mark will indicate how strong or
weak the market is. To demonstrate how to gauge the potential importance of
this area, [we did not draw any lines], look to the left of the 50% line, and it is
apparent that there was support at 1110 on the 31 December low, and that was
a retest of the trading range highs throughout November and December. This
makes the 50% retracement an area, not an absolute price, from which the
market will provide important information in HOW price responds up there.
Remember, it is not the price level that matters, it is HOW price responds to it
that reveals any significance to it.
There is a minor resistance point at 1103. That was the reaction rally high,
fourth bar from the right. It could mark the potential of starting a trading
range, or it may be ignored. We cannot know this ahead of time, so it is just
something of which to be aware, just in case.
Putting the market into a context provides us to develop a trading strategy.
Right now, with the marked increased in volume as price declined from the
highs, it looks like a trend change and prompting reason to sell weak rallies.
This makes HOW price rallies into the 50% resistance area…smaller bars and
less volume…valuable market feedback for establishing short positions.
It is always possible that the market may retest Wednesday’s lows before
continuing an anticipated reaction rally. Present tense market activity will have
to be watched to see how a sell strategy can be implemented.
