Wednesday, August 14, 2013

Mr Magoo!

Mr Magoo! I may be blind but I can see you!
Speaking of blind even an one-eyed pirate would be able to see the recent trading range we have been for the past month just by looking at the SPX PnF chart below. We spoke about the significance of the 1684.3 support and resistance area (I know I know the chart says 1685.1) in previous posts but you can also see that 1697.40 has been growing in significance over the past month.   This trading range is very critical because it can represent only one of two scenarios.  The first being that if the 1684-5 level holds as support on a daily basis this range can be viewed as absorption which would result in a bullish move higher past overhead resistance of 1697.4 and of course the all time high of 1709.67.   The second, more bearish scenario, is a break of current support (1684) which would indicate to me that this trading range was nothing more than distribution and a large drop would be the consequence.

I was providing this very same market analysis to a friend of mine today and their question in the end was 'So which way it is going tomorrow?'.  My answer was 'I don't know!'  It was funny the look I got when I finished explaining the concepts of supply and demand, support and resistance with such confidence only to say ' I don't know where the market is going!'.  You can imagine the 'you are full of it' face and look of disappointment that I received at the realization that I don't have a crystal ball.

I prefer to react to market moves versus anticipating them.  I do that by first reading the 'story' the market is telling me and build a case to initiate a position.  I have to convince myself to go long or short by analyzing the market objectively .  Lets see what the market recently has been doing in this trading range.

1. Price closes at resistance near the highs of the day on increased volume.  The fact that price was unable to break resistance on higher volume may indicate this was a transfer of ownership from the large players to the retailers.

2. Price drops confirming previous days bearish behavior. However, price closes at the 20dma support.

3. Price breaks below the 20dma, hits support and bounces to close near the top of the trading range on declining volume. This is bullish as demand overcame supply at predefined support.  However, price did close below the 20dma.

4. The price range was the largest in two weeks. Price dropped to support and bounced once again to hit both predefined resistance at 1697.4 and the 10dma before backing off and closing above the 20dma again. With the increase in volume and price closing at the top end of the range this would indicate bullish behavior.

5. Price drops on increased volume closing near the low of the day at predefined support of 1684-5 area. This is obviously bearish since the high volume and poor close indicates supply entering the market.

As I write this out I'm realizing the whipsaw action within this trading range and see how those less patient could get frustrated.  This only solidifies my rule of reacting to market movements at critical levels.  Never once did price break and close above/below any of the predefined support/resistance levels on increased volume to justify a position be taken.  As of now the story has turned bearish and a break of support on increased volume would confirm our bearish scenario and would prove to me that a short position has a higher probability of success than a long position.  So ask me again where do I think the markets are heading tomorrow and I will tell you to call Ms. Cleo.   As for me I will wait patiently and react accordingly.

Thanks for reading!

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