Saturday 16 January 2010
We have seen this action in the S & P market before. In fact, just two weeks
ago, S & P had a key reversal week, which is a new high but a lower close from
the previous week, usually a sign of weakness, and it often leads to a correction.
Corrections in the stock market have been as rare as a warm sunny day in the
summer of 2009 in Chicago. [The calendar said summer.]
Friday’s activity had a strong sell-off, just like as occurred on 28 and 30 October,
19 and 26 November, 8, 17, and 31 December. Deja vu all over again! Is or will
this sell-off be any different from the rest? So far, the odds say no. There have
been no clear indications of any ending action. We can present an argument for
a correction, based on last week’s activity, but we have done that in the past, or
at least issued a caveat, and we are reminded of the story of the little boy who
cried “Wolf” so many times when no wolf was present. [We even took a short
position on 19 November… for a minor net loss.]
We made the point on the chart that Friday’s decline erased the past 7-8 day’s
activity, but to what end, given past performance, which we all know is never a
guarantee for future performance? We could, and will say that Monday, 5th bar
from the end, made a new contract high, but the range was relatively small, and
the close was in the middle of the bar. This tells us that the smallness of the
range reflects a lack of demand, and the close says that sellers were present.
Since, the market has not been able to surpass that high, even though volume
picked up for the remining four trading days.
Note the small bar, high-end close, two bars from the end, and then look at
the volume for that day, the lowest in the past two weeks. The smallness of
the range says lack of demand, just like we said above, but this time, the close
was on the high which says no matter how weak the demand may appear, buyers
were in control on that day, and selling efforts were even weaker. Either way, the
rally bar does not make much of a statement as to the character of buying at
these higher levels.
We mentioned that the Nas-S&P spread bears watching as a clue for an
eventual turn on this market. So far, there are no signs of any change from
there, either. [See NAS -E-Mini Spread – A Clue For Market Direction, click on
this link: http://bit.ly/8JyYYC.
The move down on Friday was fast, but we see no evidence of supply selling
coming onto the market. If you look at the overall results for the past nine
tradings days, the action is holding above the 1125 area, and under that, 1110
offers some more support. It can reasonably be said that there is no damage
to the structure of the up move.
This has not been an easy market for many reasons. November and most of
December were sideways in direction. The rally at the end of December was
weak with small ranges with a year-end sell-off that made January 2010 suspect
for continuing the ongoing trend. After the high of the Nov/Dec trading range at
1110, price in mid-January closed at 1132, a 22 point gain in 28 additional
trading days.
Until strong supply comes into the market, it will most likely be more of the
same in the days and weeks ahead. As a reminder, supply selling is different
from selling that occurs as a matter of course on any given day. Supply selling
occurs on strong volume, price goes down with ease, and most importantly, it
takes out previous support areas to confirm a change in market behavior, and
that is what leads to a change in trend.
We do not see any supply. That could change on Monday, or a week from now,
or longer. One cannot know this in advance, so observing market behavior every
day for signs of change is all that one can do. When change does come, there
will be no guessing.
