Today was a very interesting day. To recap the past few days. The market bottomed on lack of supply attested to both by shortening of the thrust on the intra day charts and then by lack of supply in the intra day volume waves. Further the daily of the Spy on Monday suggested a failure of supply. All of this was discussed in earlier posts. Yesterday I pointed out that the market had paroxysms of intraday short covering. Even with those spikes, volume was the second lowest all month emphasizing a lack of anything but speculative short covering demand.It is with these observations of the supply and demand position that we approach today's charts.
Please look at the daily chart of the SPY. It has backed up to previous support/resistance at the November low. It has the smallest range and the lowest volume in weeks. This is a failure of demand against resistance and has tremendous prognostic significance for further decline. I do not believe I can emphasize enough how poor is the outcome that this portends. Please look at similar action on 2/9/09 on this chart.
Since we were not breaking out of this small daily range today, the problem on the intra day chart was to find where the speculative short covering ended, where the selling had finally saturated this very transient demand, and sell that point. The first rally at 66 still had too much demand. I thought the small top labelled with 41 might be it. Prices fell off smartly but at 123 with a bar volume of @ 50000 the market gave a climaxing indication, showing some demand remained.
The volume on the rally that began at 123 never grew steadily and was definitely less than the volume at the end of yesterday and the opening today. Demand going into the close was weaker. It failed at the narrow range, low volume mid close red bar marked with arrows. This is a different type of demand failure than we discussed before. It does not almost immediately follow a buying climax as shown in other demand failures previously. Where volume should be high, approaching the end of the day, this was the lowest volume for 40 minutes. The market confirms the exhaustion of short covering demand by selling off almost immediately. For all of the bloggers statistics showing this to be a bottom, our analysis of supply and demand, and different types of traders habits, show this is to be a great safe short sale with the possibility of a decline corresponding to the decline since 2/09/09,
