Sunday  11 July 2010

 The past two day's high end of rally look tenuous.  Two things jump out on the daily chart. 
One: the last two bars kept getting smaller.  What does that mean?  Both a lack of sellers and a lack of
buyers, but because the closes are upper end of each bar, the buyers remain in control, more by default,
however.

 Two: Look how volume keeps dropping as price rallies.  Buyers have won the battle, but the war is far
from over.  The smaller bars reflect an inability of buyers to extend price higher, especially in the absence
of any selling.  Not a good sign for longs.

 As an aside, who would be doing the selling, anyway?  This has been a politically driven rally, fueled by
the Fed via POMO, as we have stated so many times before.  [POMO = Permanent Open Market
Operations] The only sellers would be the Wall Street firms acting somewhat in concert with Washington
"wishes" to keep a positive spin on a very weak market.  This accounts for the lack of selling, and it
demonstrates exactly how little buying interest there is in the absence of active sellers.

 There is one thing, and one thing only that drives a market higher, and that is demand.  Demand is
recognized by increased volume and widening bars on rallys.  We see the opposite.  Caveat emptor.

 The 60 minute chart offers a supporting role.

 Volume on the 8th is less than that on the 6th and 7th.  Volume on the 9th is even smaller.   This chart
shows overnight trade, so the 8 standout volume bars each day reflect day session activity.  Compare the
size of the price bars for each succeeding day.  They get smaller and smaller as well, particularly on Friday,
the 9th, and it is the last trading day of the week that tells the story behind the character of the rally.

 Price was near a resistance area and the half-way point.   Thursday's range and volume were small, so
eager shorts see this and decide it is an opportunity to sell.  [We know otherwise and will address why
in a minute].   Sellers get short, but there is no concerted selling going on, and what buying there is is
enough to keep the market rallying, little by little.  The weak shorts are not making money, so they cover,
and the way to cover is to buy back their position(s).  That buying, in the form of short-covering, keeps the
rally going.  This kind of activity feeds on itself: sell and cover, sell again and cover again, and the rally
continues for this reason on very little demand buying.

 Why do we know it is not time to go short, even when there are apparent signs of weakness in the
quality of the rally?  There has been no ending activity, no indication that sellers are entering the market
in strong numbers.  The reason why we know is because there is no wide bar that closes at the lower
end of the range with increased volume.  That would be a show of weakness and a sign that sellers are
gaining control and may force a decline.  This would trap weak buyers and upset the weak sellers for not
holding on to their positions.

 With little demand, why buy.  With no apparent supply, why sell?

 Let the market play itself out.  The signs to take action will be apparent.