S&P Analysis

S&P – Trend Change? [18 May 2009]

There are signs that the daily trend is changing,
or has changed, from up to sideways, at a
minimum, and perhaps down. The past 9 week
rally covered more price range in three months
than any other similar time period prior to year 2000.

Question: Why did price stop at 927? Why not the
943 the more obvious area?

Answer: January 2, 5, and 6 were small range bar
rallies and a cluster of closes. 6 January was the high
of the rally that had a low end close at 928. On 7
January the decline resumed into the final low on
6 March, 43 trading days after the 6 January high.
Another 43 trading days later, after the 6 March
bottom, price made a high on 7 May at 927. Price
had come full circle, 43 trading days down, 43 trading
days up.

Where does price go from here?

The entire rally from the 6 March low has been
characterized by a lack of supply entering into
the market, or at least some prominent display
of it. Last week was the first time in 9 weeks a
close was on the low end of the range. Normal
corrections in an up trend for S&P are 1 to 3 days.
Most corrections since the 6 March low were 2
days. Last Friday was the 5th day of the current
correction, and in the process, the trend lines
from the 6 March low, and the secondary trend
line from the 1 April low were both broken.
Collectively, these mark a change of behavior in
market activity from positive to negative.

The 15 May Friday low was 876.75, and this
could be a short-term area of support for the
following reasons: In mid-February, two rally
attempts failed at the 875 area, basis the
current Jun contract, [previous resistance
becomes support], and that was about 50%
of the Jan-Feb trading range. Half-way points
can become important depending on HOW
price activity approaches and reacts to them.
In this specific instance, market activity failed
at that level.

Market activity failed again on 17 April when
the rally stalled at 872 and price gapped lower
next trading day. The decline only lasted one
trading day plus 60 minutes into the second
trading day when demand volume entered to
stop price at just above a 50% retracement of the
30 Mar low - 19 April high trading range. That
price gapped down and away from 873-875
tells us it is an important area.

Two likely scenarios will develop: 1) 875 +/-
support holds, and price will retest somewhere
between there and the 927 high of 7 May, or
2) current support will give way and a down trend
will resume, taking price to another likely support area.

If price were to hold and start a retest rally, 902
is a 50% retracement and an area of a gap down
from the close of Tuesday 12 May. This is just a
potential guide to provide some direction that will
be calibrated depending , as always, on developing
market activity, the “story”of the market and the
most reliable source for information.

If support gives way, in the second scenario, we
get to watch developing market activity unfold
before our eyes. The strongest area of potential
support comes in around 800, a nice round number.

Why 800?

An interesting development occurred back on 18
March that relates to this current projection.
Volume was exceptionally high on that day, and
high volume can sometimes be stopping action,
but not in this case because price rallied above it
three trading days later.

Then, what was the purpose of this unusual high
volume spurt?

The public are not creators of high volume, but
are reactionaries to it. High volume is often smart
money active in the market, for some reason, and
when smart money acts, it typically is a transfer of
risk from weak hands into strong, or strong to weak,
depending on the objective of smart money actors.

Back on 16 –17 February, price gapped down on a
240 min chart, [overnight Globex activity in not
included], from a close at 804 to a next period open
at 799. Keep in mind that the market had been
dropping like a rock since September 2008, making
ALL trends decidedly down, so in mid-March, when
price was rallying back to that gap area, to most of
the world it looked like an opportunity to get short
in a very negative market environment. This is why
volume was so active for that day on 18 March. Turns
out, smart money was actually buying as the public
was loading up to the short side.

Guess who won the battle?

Yes, the market did close lower for almost two days,
making shorts believe they had a rout going on, but
price immediately reversed back to the upside,
eventually to the 7 May high. The high of that strong
volume activity of 18 March was 800. This means
when price comes back to that level, it will be defended
and act as support, at least initially. This information,
gleaned from past market activity around 800, plus the
fact that it is now also 50% of the Mar low – May high
trading range, tells us that 800 may be an important
stopping point if the daily trend has indeed now turned
down.

Are there other possible support points?

Absolutely!

836 is a level that functioned as resistance in February
and as support in mid-April, so that could be potential
support. The 825 area marks an important spike low
reversal, just under 836. Then, 775 goes beyond the
half-way mark, and if the market weakens considerably,
that becomes a potential support area. These are possible
target areas for establishing short positions at current
price levels, from 890 and above. Friday was the first day
for establishing a short position from 893.

We cannot know for certain where price will find support
for the market will go where it will go. However, we have
a priori potential support levels to act as a guide, and we
get to watch market activity along the way, looking for
clues, for market information that will tell us the likelihood
of potential support holding, and for more clues to sell
additional short positions at resistance points along the way.

It is impossible to determine how market activity will develop.
As long as we know the prevailing trend, which is the most
important piece of market information, along with the
identified potential support levels, at least we are not flying
blind, and in the land of the blind, a one-eyed man is king!