I find it interesting when the markets make new all-time highs how people do one of two things: they get busy with calling a market top or they make some type of prediction of how high the market will go before it reaches a top. Both I believe are equally stupid. If the markets are in uncharted territories hows does one gauge demand or better yet that demand will cease to exist at a predefined level that hasn't transacted a single trade? We have what I lovingly call the Ms Cleo syndrome. I believe that the plethora of top calls come from the fact that with new highs being hit daily several widely used technical indicators are screaming the market is 'overbought'. I never understood how an indicator indicated that markets are over bought. Is that not the decision of the market participants to decide when the market is overbought? If the current market levels are widely viewed to be overvalued then wouldn't the intelligent market participant sell their positions resulting in a market decline. If so, then only after the decline has began in earnest would you be able to call a market top. Otherwise you are simply guessing. If the market is moving up then I can only conclude that demand is still present not overbought (whatever that means). Make sense? Technical indicators are not overbought. Unfortunately, they are overused and worse yet misunderstood which makes them dangerous.
The market provides us with clues everyday of the intention of masses. So when the market begins to trade in these uncharted water we must take it day by day and see what story is evolving. In my previous post I explained that I believed the intention of the masses was to rally the market and the tactic they used to keep emergence of supply at bay temporarily. We hinted at the market challenging the all time highs since after gapping above the supply area of 1692 there was no supply above to really stop the markets from bursting higher. All it needed was some good news. FOMC to the rescue!
If there is to be a market top then we should look for signs of distribution. First lets look at where intraday support and resistance are for the past couple sessions.
Below is a 10min SPX PnF highlight the support and resistance level (remember this is a 10min chart but we have to start somewhere). There was a double top at 1728.6 and breakout and now breakdown between 1724.6 and 1723.2 (let us split the difference and call it 1724) and a breakout at 1705.8. Simple enough.
Now lets see what type of volume has been transacted at these levels to get a better picture of supply and demand. You will see the relatively large amount of volume at the 1705 level. Interesting is the volume air pocket (I just made that up) between 1705 and 1718. Also interesting is the breakdown of 1724 and now what looks to be test of that broken support. A break below today's low at 1720 should result in a quick move back to 1705. Lets see how this plays out.
Thanks for reading.