Sunday, July 28, 2013

Story Telling

I realized that analyzing the stock market is a lot like story telling. Although this story doesn't include a blonde, three beds and big bad bears, the stock market can get just as nasty.  I've been trying to come up with clever analogies to better explain my market analysis.  Each price and volume bar really does tell a part of the overall story.  Think of each bar as a paragraph in a book. Just as you need to read several paragraphs to get the complete picture,  one price and volume bar doesn't tell the whole picture but just as important to the overall story.  If price and volume are the paragraphs then support and resistance would be the chapters.  It is at these inflection points that we need to have a clear picture of the market story to determine what price is going to do next at these pre-defined levels.  You would be doing yourself a great injustice by only looking at each price volume bar in a silo.  Remember the adage "one day does not make a trend"?  Well it's true, but I like my paragraph and chapter analogy better!

So lets look at the paragraphs for this week and see what the market is telling us.

I'm reposting the PnF chart from my last post early in the week again to identify the support and resistance levels.  What I didn't highlight (that maybe some of you keener's saw for yourself) was that the 1673.9 area of support and resistance came into play this week.

Below is the candlestick chart with the support and resistance levels.  Lets go through each day.

July 22 - Small price range with very low volume with price closing near the middle of the range. This indicates that demand is weakening.

July 23 - Another small price range with a slight increase in volume closing near the lows.  This is bearish as supply is beginning to enter the market at the all time highs.   This is typical at all time highs as some investors are trying to time the top and get nervous since they are actually seeing a profit.

July 24 - Large price range closing near the lows with an increase in volume.  This bar is interesting because we closed near support on increased volume with the mood of the market now turning slightly bearish.  The plan would be to see how we close the next day.

July 25 - Volume increases steadily with price closing near the highs and above support at 1684.3. This indicates to me that demand is overcoming supply at support which is what you want to see for a continuation of the overall uptrend.

July 26 - Price drops at the open only to hit support (1673.9) mid-morning (low was 1676.03) before rallying for the rest of the day.  The price range is large with price closing at the high for the day and again above the 1684.3 support level.  This is bullish as it solidifies our bullish analysis the day before.  There was a transfer of ownership from weak to strong hands at support (demand overcoming supply) as one would expect at support

Conclusion:  The supply that we saw come into the market this week was been accumulated as we hit support which is bullish and portends higher prices.  So what did we learn today?  Something about price and volume being paragraphs and support and resistance being chapters and that Goldilocks might have had a dark-side to her.

Thanks for reading.

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