Let's begin by recapping the past 7 market days in the SPY. Support began as noted on 1/15 with a classic reversal bar on high volume. Instead of an automatic rally on 1/16, we made little upward progress on a narrow bar with good volume. The pressure of supply was not lifted by a the"washout " that creates a true reversal. As noted in the blog of !/15, the financial stocks which are the downside leaders suspiciously did not participate in the reversal. The supply carried into 1/20, holiday intervening with a sharp sell-off again on good volume with a 5+point spread from high to low. (Although not Wyckoff, the down/ up volume ratio was a very bearish 20+:1.) The close below the low of 12/1 on 1/20 places us in a spring position. On the 21st all we can muster is an inside day, with a close near the top on less volume. The 22nd we have another inside day with a lower close, no follow through, but on higher volume. The supply has not diminished. On the 23rd, although we briefly move below the low of 1/22 on the opening we then struggle up all day and manage a higher close, the volume for the day is down. At no point on the 23rd does the volume of the advance come close to the volumes on the advance during the two previous days. In this whole trading range we have only punched through even the most minor intra day resistance with a spurt of high volume. Clearly there was not enough demand to move through the top of the trading range. In fact the difference in volume between 1/23 and the two previous days was the failure of this demand to enter the market.
Taken as a whole we have spent 4 days in the spring position which moves it from a potential spring to the "hugging the lows" category. That we have not been able to retrace 50% of the loss from 94 to 80 further helps to indicate that the trend is down. To summarize, I believe we have supply, a fall off in demand and an inability to rally, all telling us the next move will be down. In spite of all the obvious support we have not been able to rally through the top of Tuesday's range. The tightness of the range for the week, all contained by Tuesday's high and low portends a sharp move is coming.
Should the above analysis be wrong, then the action described would be bag holding, perhaps awaiting some news or other. In that case we must be on the watch for large demand to punch through the top of this trading range. To reiterate so I cannot be accused of fence sitting, I do no believe the persistent supply I just documented is going away. Even if we rally, we will run into supply that limits any gains.
