Saturday  21 August 2010

 Getting a reliable fix on the S & P since April has not been easy.  The huge drop in May is somewhat of an anomaly.  It appears to have been a washout with an immediate recovery, but the recovery did not sustain itself, and price went on the make lower lows.  Let us call that "unusual" and leave it at that. 

 We went short last Wednesday at 1093.  Half the position was covered on Thursday at 1075, as a money management move locking in sure profits and managing the balance with a stop, now at 1072.  If the stop is triggered, it will be the first time that price is making a higher high after a higher low, using smaller intraday time frames, and that could be the start of a counter trend rally.

 Downside objectives start at 1060, 1052, 1040, and 1000 areas.  We have drawn a few horizontal lines to capture the trading ranges.  The heaviest line at the top and bottom represent the largest of the three.  The top line is the primary resistance for all each of the trading range considerations.

 The second heaviest horizontal line, from the bottom, takes into account the May lows with the July activity as a possible failed probe lower.  The third, lighter horizontal line off the bottom, captures the most recent developing market activity.  Despite being short and anticipating yet lower prices, one cannot be wedded to any position for two reasons.  One, there are no guarantees, and two, anything can happen.  Included in the "Anything can happen" mantra is change.  Trading egos sometimes fight a market that is in opposition to a trade decision made, usually waiting for the market to recognize the "wisdom" of one's trading acumen. 

 The other lines are drawn from swing highs to swing lows.  This gives a clearer view of what the trend is without all the intervening "noise."  After making new recent lows at the beginning of July, the reaction rally erased nearly all of the previous decline.  How weak can a market be if a decline can be negated by
the next rally?

 Well, not so easily answered.  Since April, the trend has been down.  Since July, the downtrend has now changed to a Trading Range, a non-trend, but still preceded by a strong move down, and the burden of changing the current environment rests with the buyers, and so far, buyers are not making a convincing case.  A trading range can also be a resting spell, of sorts, just before the market resumes the direction prior to the trading range, which was down.

 Also, the decline from mid-June to the July low took 10 trading days.  While virtually all of the decline was recovered, the recovery rally required 22 trading days, over twice the amount of time.  This tells us that the rally was more labored, and that makes sense, giving the down trend that came before it.

 But, and anytime one uses the word "but," it means to ignore everything that was just said.  While we are not saying to ignore what was just said, for that would be a mistake, the argument can also be made that the swing rally from the July low to the August high was greater than the swing rally from the May low to the June high! 

 Does that show greater strength, then, on this last rally?  Not really.  For all that effort, what were the results?  A draw, no new swing high, and that is in keeping with knowledge of the trend and the action that came before, as we have been describing.  What this does is lead to the logical conclusion shown on the chart.  A trading range!  One with a downward bias, but still a trading range, nonetheless.

 What determination can be drawn from all of this? 

 Flexibility.

 However "bearish" we may want to be, anticipating lower prices, the market is what determines where price will go, and when.  We had no idea what this article would be, prior to commencing writing it, but preparing a chart to discuss led to identifying the trading ranges within trading ranges, and tempering expectations.

 When the stop was entered intra day on Friday, it was not in contemplation of seeing multiple trading ranges, but rather the possibility of a counter-trend rally and a defensive measure to protect gains made.  As it turns out, the lowering of the stop to1072 does fit in with the theme of this article.

We are also paying tribute to the market as the final arbiter for price direction, and our practice of following the market's lead instead of establishing a position in the hopes that the market will follow.  Trading ranges are the most challenging market environment.  The up and down activity makes it difficult to stay with established positions in expectation of directional continuation.

 Remaining short, for the moment with a 1072 buy stop, and flexible, as the market demands.