Sunday  15 August 2010

Once we saw price cascade down in the first hour on Wednesday, it was a signal to get short.  Price did reach a near-term oversold condition on Thursday that left behind a failed probe lower and confirmed the oversold condition.  As price opened lower on Friday, we took partial profits at 1076, from being short at 1095, staying with the remainder because the trend was still down.  By the end of the day, weakness returned, and that will be discussed on the 60 minute chart.

What is apparent from the daily is that the low end close from Friday argued for lower prices starting next week, which is tomorrow, as we write.  It is clear that there was no need to "predict" or "guess" what the market "might" do.  Developing market activity provided all the necessary information to make a decision.  Knowing the trend was down, the only decision to make was from the short side.

The small bar at the end of the chart is the beginning of Sunday evening session trade, and it is obvious that the bars from Thursday and Friday, saying lower prices were likely, is coming to fruition.  How much lower and for how much longer, no one knows.  Just let the market unfold and tell its story.

 We did place a few horizontal lines from previous swing lows that may offer support as price declines. That needs to be monitored is how price reacts, once at those levels, and we will get important market information about staying with a developing down trend, or not.  Still, no guesswork involved.

On the 12th, you can see the failed downside probe mentioned earlier.  Price went to 1069 and then made a recovery, of sorts.  What remained to be seen was the quality of a potential recovery rally.  As price opened lower on Friday, initial market activity showed responsive support, and it was shortly after the opening, the large green bar on the 13th, that half the short position was covered at 1076.

 We viewed it as a retest of the failed probe on the 12th, and that meant a recovery rally was possible. It was for that reason that half the short position was covered.   It turns out, after the next five hours, the rally attempt was anemic, unable to make it to 1085 let alone the 1089 area, the last swing high for that time frame. One never knows, and there was no evidence of a turnaround to warrant not staying short the balance.  Locking in profits earlier in the day reduced risk exposure on what remains.

 You can see from the decreased volume there was a lack of demand, [buying effort], and given that the trend is clearly lower in that time frame, the burden is on the buyers to turn things around.  Absent any effort from unwilling buyers, the market continued in the direction of the established trend, lower.

 This perfectly exemplifies the importance of knowing the existing trend, and on all time frames, in order for decision-making to allow for a greater probability of success in trading.  We do not know if price will be higher by the time the day session opens on Monday.  It may be much lower.  What we will know is how to respond once new information is provided during Monday's session.

 Staying short and with the trend, for now.