We have quite a bit to do tonight because some of the trends in the market are changing. Friday was the highest close of this rally in the Dow and it happened on the lowest non holiday volume in months. The market closed up, near its high, with a small range having declined below Thursday's low before rallying. So is this lack of supply, lack of demand or just lack of interest? The closes have been about the same for three days in a row, and the volume has declined over the two weeks of rally. That is hard to paint bullishly. After all having broken into new high ground Wednesday volume does not expand and we proceeded to go nowhere. We did not decline either but that does not seem as troubling. There is still no serious supply on the daily chart.Let us now look at he hourly point and figure of the spx. It is bullish. It broke into new high ground and has not given back many points. Should it continue in this range of 870-880 we will have to consider it bearish as then the flattening would indicate supply is overcoming demand as our three equal closes above also might indicate. Whichever way this market goes, there is quite a large count.
I want to look at he pnf of the 5 min. Basically we did the same thing twice, once on the 27th and28th and again on 4/30 and 5/1. The market came down and consolidated enough for the red line to be drawn, it then broke through the line either in a spring or a shake-out and then rallied sharply. This tells us there is no supply left below the red line. We consolidate and then break the green line. The buying power can take out the resistance. Prices then retreat back into the trading range before exploding. ( On 5/1 we made new highs in the futures before the close.) This pattern has become very common these days in many places, for example July Wheat, not shown, or the 60 minute GLD chart above.
Please turn to the 5 min bar chart above. I have labelled many relevant bars, but to tell the truth I believe this chart is neutral, neither buying power nor selling pressure have any advantage. Until the last 5 min we were swinging equidistant above and below the previous close. What I would like to comment on is the area I have labelled 8, the declining volume with the price rally until 3:55 . You have seen enough of these closes by now to know this is highly unusual, even for a Friday afternoon and points to a lack of demand. The strong buying at the close is thus even more surprising coming out of nowhere into a thin market minutes before a weekend.
So how would Mr. Wyckoff deal with a lackluster market? He would look at how the leadership is doing. Please turn to the chart of the xlf, $BKX. He would carefully watch the weakness especially in the $BKX and see if the index begins to follow with volume. We should know shortly.
Please turn to the pnf of the dollar index. The spx has tended to go the opposite of the dollar index most of the last nine months at least. Notice that the ranges have tended to flatten over 84. We upthrusted to 89 in March of 2009 and most important the ease of movement, the path of least resistance has been down since the end of last year. So will dollar weakness drive the spx higher or the banks drag it lower?
Dollar weakness will bring in its own problems, commodity inflation for one. Notice the Goldman agricultural index. It has done exactly what we described for the spx and gold. It consolidated at 272. Had a shakeout to 248, rallied through the top of the consolidation to 320 and then fell back into the trading range before exploding upward. I have included a bar chart of one of the agricultural indexes for your perusal.
I do not want to get into issues of causation, but I will add the third evil sister to dollar weakness and commodity inflation, rising long term interest rates. Please enlarge the chart of the TLT. Please go through on your own and explain to yourself why this chart is so bearish.
Finally please look at the chart of GLD. Friday was the lowest volume day of the year. There is a very good chance the supply has dried up. All we need is demand and this market is off to the races and for some time to come.
