Being the weekend, it gives me a chance to read other blogs. From the point of view of Elliott
Wave and Sentiment everyone is looking for the rally to begin. Some of the Sentiment folks have noted the lack of panic, but nevertheless optimism is still approaching the very low levels of last autumn. Volatility not exploding is considered bullish, volatility supposedly leading price. Magic fibonacci numbers are in the 640's or at 662 and will support or turn the market. With the bewildering variety of theories all leading to the same conclusion, a rally is imminent, let us look at the the Wyckoff approach and reason our way through such simple things as supply and demand, trends, weakness and strength, effort and result, support and resistance, and the habits of different types of traders.
Far from all of these distractions let us begin with the most important factor, the trend, in our largest time frame chart the 3x point and figure. Moving down it remains far from its support line. It is the picture of a downward trend with lower lows and lower highs etc: Most importantly, it is more than 10% below its low 0f July 2002. This implies a serious
trend that will go further than anyone reasonably thinks. Of course we can have intermediate term rallies but the power of this trend must be respected and given precedence and it will not change on a subtlety. This trend has power and it will take a lot of effort to alter it.
Moving to the weekly, we penetrated and moved substantially below last November's 74.34 support. Volume rose, and the spread widened indicating ease of movement and the willingness of large interests to follow prices down. Closing in the bottom half of the range, supply was greater than demand, but some support came in to raise the market off its extreme low. The market could rally towards the red line, but so far there is nothing here to indicate a change in trend. In fact by making the lower low, we just confirmed the downtrend by definition. The angle of decline is getting steep but one would expect that, just having broken through support.
The daily closed higher on the day in the top half or its range on slightly increased volume, telling us this market is not necessarily a one way street. So we must ask about the quality of the demand, where it came from, what motivated it, etc; Is it smart money that knows about some new weekend surprise? Is it just nervous shorts? Traders worried about options expiration week? By the way I have a feeling that Mr. Wyckoff in Chapter 7 told us that as long as the market keeps going down like this on moderate and increasing but not climactic volume, shorts have nothing to worry about.
So lets look at the intraday. Today we do not need to look at wave volumes. Please observe the third bar of the day. It is a buying climax. Shorts are madly covering and others who did not sell the rumor are still buying the fact. These conditions and rapid moves according to Mr. Wyckoff trigger large sophisticated traders to sell into the move and that is what happened. Prices reversed and the selling continued until climaxing at line A. The market then rallied weakly to 682.75 and then sold off steadily to line B. At B there was again a minor climaxing indication. The move to B penetrated the low at A by very little. The move to C penetrated the low at B by even less. This is called shortening of the thrust. It tells us the force of supply is diminishing and that the line of least resistance is changing. We are not bottoming on buying but on tired selling. Now all the nervous shorts before the weekend rushed for the door, rallying the market 24 points on very heavy volume. Did the large players sell into the up move just like they did earlier in the day? In which case the demand will be hollow and prices will resume their downward course. Or is this a more meaningful change in trend? Having said sit in my last post, should I have put on my Nike's to run? Here I am looking for a panicky selling climax to cover my shorts and instead we just had 2 panicky buying climaxes in one day. We are down more than 25% since the January high and the shorts are nervous about their position and running for the door. Go figure.
More seriously, the financials have led the market down and up. Please look at XLF. Although surprises can happen, it has no indication of any major change in behavior.(It closed in the top half of its range for the first time in 8 days.) More importantly, Goldman, the fair haired child of the financials broke down on the daily. The purple line on the intraday is the 5 min close of the SPY for comparison. Look at the massive selling of Goldman into the end of the day demand. Draw your own conclusions.
