Tuesday  31 August 2010

     The last day of the month, so time for a monthly chart.  We will start by pointing out what is labled as
an "SOT High."  SOT = Shortening Of the Thrust, or the directional momentum coming to a halt.  As price
was making new rally highs in April, the smallness of the range tells us that sellers were not only meeting
the efforts of the buyers, the lower than mid-range close on the bar also says that sellers were stronger
than buyers.  Were it otherwise, the range of that small bar would have extended higher.  A Red Flag.

 May saw that huge single day drop that resulted in a large monthly range lower, and volume was the
highest in a year and a half.  However, note the close, just under mid-range.  From that observation, we
know there were buyers at the lows.  This is confirmed by the June bar that closed on the low, but the
net downside direction was not much further after May's effort.   Where was the payoff for all that
volume?   This tells us that the downside momentum is weakening.

 July confirms that, [second bar from the end], by a brief new low, followed by a strong recovery rally that
was able to close high end.  Alas, there was no upside follow-through, and that brings us to month just
ended, August.  A lack of follow-though downside, and then a lack of follow-through upside.

 There is obvious resistance at the 1130 area, the highs for June and August.  The close for this month
is near the low end, and that tells us sellers won that battle, but buyers are still fighting and preventing
price from breaking the 1035 area, at least for now.  Since May, price has been in a trading range, and
that shows more clearly on a daily chart.

 Yin and Yang are complimentary opposites.  Light and dark; hot and cold; and to our point, balance and
imbalance.   The last six trading days show a Mexican stand-off, to extend our little international word
descriptions.  There is a balance between buyers and sellers, but that "balance" underlies an ongoing
struggle for control of price direction.  This can happen most often in a trading range environment.  What
we know when there is balance in the market is that it is temporary, and from it will come imbalance. 
Either buyers or sellers will regain control, and price wll move away. 

The problem with a developing trading range is that it is hard to recognize, initially, and it is why we took
a larger than normal stop-loss when price reversed instead of continuing down, in an earlier trade.   Had
we known  a trading range was forming, the stop would have been lowered much sooner.  This is why
you will see us repeat that the level of knowledge is the least when the market is in a trading range.

 This current developing situation also exmplifies the importance of following a market and not trying to
get ahead of where you think it may go and hope it catches up with expectations.  [See S & P - Market Dictates Flexibility, click on http://bit.ly/9UuoMU, first paragraph]. 

 From the monthly chart, the closing price looks weak, however, the longer term time frames are not very
good for timing, so we look to the daily for that.  So much for gaining clarity from the daily, and so, it is
best to wait for the market to declare itself as to which way the imbalance will move.  From August alone,
price is in a clear down trend, but that ignores all the activity since May, and it shouts loudly of a trading
range environment.

 Both last Wednesday and Friday were higher volume strong close days, [the third and fifth bars from the
end, with green volume].  Then came yesterday's somewhat surprising strength-turned-to-weakness
sell-off.  No new low occurred, and the early downside failed to make new lows as buyers entered the
market, once again, and prce rallied from the 1040 level to the 1053 area, and that is where we stand.
 
 Which way?  No one knows for certain, and so we turn to the market for clues.  Mondays sell-off did not
attract much volume, the least amount since early in the month.  Where were the sellers?!  Volume did
increase today, the last day of the month, and price closed higher, but, the range is not very large, and
that is a not so minor problem, at least for the buyers.

 You can now better understand why the level of knowledge is never high within a trading range.  Still,
just knowing that is important, for it tells us to be much more cautious, as price can, and has, turned on
a proverbial dime, regularly over the past six trading days.  We forgot to draw in the support line
around 1040, and the upper resistance at the 1135 area.  Price tends to vaccilate closer to each level,
and there is the possibility that the trading range will continue, at least until we see a decisive breakout
one way or the other.  That is why we said price could rally more.  1080?  1130?  Maybe not even 1075?

 The good news is, we do not need to know for what we get to do is watch developing market activity,
and it will provide the necessary clues.  If price rallys, the clue for a reversal will be easier to see.  If
price fails, the speed of movement down, without knowing if the move down will stop, as they have of
late, makes getting short more difficult, initially.  Because we are near the bottom end of the trading
range, we also know price could drop quickly, say to 1032, wiping out all stops just under the market,
and then make another speedy recovery rally and trap new shorts, as well.  While we cannot know in
advance how the market will develop, we can prepare for different scenarios.

 Sometimes, it seems as though the market's intent is to punish the most participants, and it is so easy
to put the blame of losses onto the market.  There is one very large issue with that.  The market is neutral.
All it does is generate price and volume information, as a result of all the participants placing buy/sell
orders.  The market just is.  It does not know, nor does it care who is buying/selling when or where.  The
ones who DO CARE are the participants.  It is the individual traders who place perceived "meaning" onto
price outcomes.

 Can the market ever do anything to anyone?  Absolutely not!  Did the market make the choice for anyone
to enter a buy or sell order, and when to enter it?  No.  Market activity certainly prompted action, but any
action taken was derived from PERCEIVED opportunity, at the time.  The biggest problem is most traders
do not like to accept responsibility for actions taken, unless of course, the trade was a winner.  But for
losing trades: "The market got me!"  Yep, blame the market for what you did.

 We digress, but not really.   Everything ties in.  We went on at length, a bit, to show that the markets
are not so random.  They do tell a story.  The problem with that is not too many people learn how to
"read."  It ain't easy, but whose fault is that?  Most technical analysts rely upon mechanical applications.
The favorite?  Moving averages!  How rich is that?!  Take an average of the past and impose it onto the
present tense activity, as though there were a cause/effect relationship between the two.  We go back
to the stopped clock analogy.  It is very accurate, twice a day.

 There are also RSI, Bollinger Bands, MACD, etc, and we have no clue how the last two work?  The market
compostion is comprised of people making buy/sell decisions, and very often, there are emotions attached
to the decision-making process.  Does anyone really believe ever-changing emotions and ever-changing
participants can be interpreted through rote methods that use past tense activity to capture the present?  Maybe in the minority, but we do not think so.  That is why you will never see here, reference to extrinsic
mechanical applications to interpret what is going on in the NOW moment.  And at that, we do not always
succeed.  If it were easy....

 We remain on the sidelines, for all of the above reasons.  Say no more!