Sunday 30 June 2013
[This commentary is for our British readers and posted here as a matter of record]
Put all news and opinions aside. The best and most reliable source for market
information comes directly from the market itself, the clearinghouse for all of the
decisions that are executed in the marketplace. It is actual executions that matter
Our primary focus for stocks is the S&P, being Chicago-based, but a chart is a chart
by any other name, and the FTSE dances to the same beat of supply and demand, as
all markets ultimately do. Here is what the market has to say, based upon collective
input from all sources, from the best and most informed to the least and uncertain.
The 2nd Qtr just ended, so we start there. Plus, it is an easy chart to do because there are
only two important pieces of information that recently converged before diverging. The
dark horizontal line crosses two previous highs, and the last Qtr just retested resistance.
What is key on any retest is how price responds or reacts to it. The response was quite clear: a Key Reversal, [KR]. This occurs when price makes a higher high, closes low-end,
and under the previous bar’s close, as in this instance, [there are other variations]. It
almost always signals a top, of some degree.
The level of synergy from one time frame to lower time frames becomes important when
they validate each other. To the monthly…
A KR or not a KR high? Labels are less important than the actual market activity being
considered. We see another retest of previous highs, and the response is a reaction away
from the high. There was no attempt to absorb sellers before going higher, as would be
expected in an uptrend. Instead, the lower close is the market telling us that sellers were
more dominant than buyers, and at an area where buyers are supposed to be in control.
This is a red flag bar.
On the next bar, June, the range is wider and to the downside, also with a weak close. The
sellers that appeared in May are pressing their cause, and doing it successfully, as was
forewarned. The low of the bar stopped just above the round number 6,000, which is also
now potential support from the last swing high.
Note how the resistance line, on top of the swing highs, is not a straight line but more of a
meandering line that more accurately reflects the market activity. January’s bar was a
breakout rally, 6th bar from the right, with a wide range up and a relatively strong close.
That strong bar can act as support on a retest, so you can see how market activity from the
swing highs and the strong rally bar advertised a likely support area months before it was
retested, just last month. The issue with the retest is how price declined so quickly going
into potential support. The month of June erased 4 previous rally bars, prior to May.
The warning from the Qtrly chart is showing more detail in support of it on the monthly.
The weekly amplifies the monthly with even greater detail. Compare the 6 bar decline
with the more labored rally to high that began in January. The ranges down are much
larger than the rally bars. The ease of movement is clearly to the downside, and that
means the sellers are more in control.
On the Qrtly chart, we added the comment to sell rallies against the high, based on the KR
formation and poor close. The character of how the next rally unfolds, will be the market’s
message of what to expect moving forward. If the rally bars are relatively smaller with few
strong closes, and volume declines, expect more weakness to follow.
Ignore the news. Too many people read the news or listen to highly biased media talking
heads that want to cheer prices higher. The market will be providing the best ringside seat
with the most current price information you will find anywhere. It is available to anyone
and everyone at the same time to read. Its message is the most accurate of all.
There is an improved close on the last bar of the week, and it suggests a rally of some sort
going into July. We do not know if a rally will occur, but it is not necessary to know. All
we have to do is follow the developing market activity flow, letting the market lead, and
then simply follow along.
None of these 3 time frames are used for timing entry and/or exit for trading. The daily is
more suited for that purpose.
There were ample signs to no longer be long this market, but that is past tense, and what
matters most is what to do moving forward. The three higher time frames just reviewed all
say the trend has weakened. The daily trend has already turned down, by virtue of lower
highs and lower lows.
As trend followers, one does not want to be long in a downtrend. The market structure has
provided a roadmap of what may happen next. Now we enter the realm of “If, Then.” IF
we see a weak rally into the area shown on the chart: the 50% range resistance, the failed
rally at 1., the wide-range ease of movement down bar at 2, THEN we know the odds favor
going short, with an edge.
There is no guesswork, no predicting, no shooting from the hip, as it were. Instead, we
have the factual underpinning of market activity as a guide. It is the character of the next
rally that will confirm the edge to go short, and IF it does not, THEN there is no trade to be
Using the factual character of past market activity, and measuring it as present tense
market activity develops eliminates having to know the future. We get to deal with what
IS known, and it applied well, the future will take care of itself.
The money is made before the trade is even made. now you know why.