August 21st, 2009

Traders Recant But Be Skeptical …. Very Skeptical

If you have never really believed the notions of “resistance” and “support” and believe that those interested in technical analysis and stock charts deal in hocus pocus then all you have to do is look at the market’s interesting action so far in August as reflected in the S&P 500 Index.

In the chart below, the Index is represented by the two red dashed lines (daily highs and lows) and the black line between them (daily closing values). It’s fairly evident that the market has bumped up against resistance at 1010 several times for nearly three weeks (the black horizontal line) and has found support at the 300-day moving average (the diagonal black line)

The struggle between the bulls and bears is pretty much in equilibrium. Monday, the news from China sent world markets spinning but the bears could take our markets down (as described earlier in “Did the Earth Shake Today?“) only to the 300-day moving average from which it has rebounded back up to the 1010 resistance trendline.:

But if your rooting for the Bulls, I wouldn’t become too complacent. Today’s market action had its own interest twist. While the Index was able to rise back up to that wall of resistance at 1010, it did on low volume possibly indicating little conviction as detailed in this 1-minute chart:

A clear divergence occurred between the Index and the volume trend of shares traded, as represented by the On-Balance-Volume (OBV) line. I can’t explain how or why but even though the Index ticked up, it did so on less volume than when it ticked down. Hence the negative slope of the OBV, especially during the last hour as the Index was rising.

Before I saw the OBV indicator, I was hopeful that chances were pretty good for the Index to break above the 1010 resistance trendline tomorrow or early next week. But that negative divergence in volume seems to point to continuation of the struggle between 1010 and the 300-DMA. I earlier thought that the zone of this “Traders’ Remorse Correction” was between 1010 and 950 but it seems that buyers continue to absorb any supply that’s thrown at them and, thereby, prevent an orderly retreat.

When the supply/demand equilibrium is broken by either the Bulls or Bears muster enough force to push the market over the 1010 resistance (or under either the 300-DMA or 950), then it will be as if the dam were temporarily broken and either demand or supply will come rushing in. Obviously, I believe it will be above 1010 for a strong, relatively fast move to 1100-1150. But it could just as easily be a move below 950 and the beginning of another …. I don’t want to go there just yet.

==================================================================

I’m looking for something else to move above 1000. I’m looking for the average number of readers for this blog to crawl above 1,000/day. If you’ve found the opinions and insights here, perhaps even some of the recommendations, of interest and value then I hope you will tell your friends. Mention the blog in an email or include a reference and link in your own blog or website. I read many blogs and I try to make this one unique both in orientation and depth. My compensation? Knowing that the effort is worthwhile and that you’ve benefit from it.

Subscribe below or click here to learn more about help for navigating turbulent markets.
  • Anonymous

    It is all about XLF…Can XLF go back to $20 before lehman brother?

  • Anonymous

    Guru,

    From MACD & RSI,the market does not looks like going to come down at all? Do you have different view on this?

  • Guru

    I agree it's more important for the financials to go up than homebuilders, retailers or tech. I own some XLF and, often, do some day-trading of FAS.

  • Guru

    Market does look much stronger than I expected. Everyone, including me, has been looking for the "pullback" that never seems to materialize. That means that when it does come (in the 1100-1150 range) it will be quick and deep. Be prepared.

  • Anonymous

    There's probably many people reading your blog through an RSS reader. Don't forget to take this into account when evaluating your readership. Keep up the good work!