Thursday, November 21, 2013

Breakouts and Fakeouts

Oh what a tangled web we weave,
When first we practise to deceive!
Sir Walter Scott
In our last post we had expected a continued move down to our pre-defined support area of 1773.  We didn't quite get there before the market reversed and that might have been because the 10 day moving average (dma) which was slightly above our level of support.  The SPX 15min PnF chart below was taken at the close of November 20 when the markets closed lower but still above the 10dma.  Unfortunately, PnF charts can't plot daily moving averages taken from a typical bar or candlestick chart so we just need to be aware of them when analyzing the markets using just PnF charts.  What the below chart also reveals (which is why I find find these chart invaluable) is the small trading range which look to have resolved to the downside at the time until it found support (at the 10dma).   For the quick and nimble day trader they could of taken a short position on the break of the trading range and covered at the 10dma.  Yes, hindsight is a wonderful thing.

The current trading range highlighted in yellow (1795.2 - 1787) continues to develop today the SPX moving back into and to the top of the range (resistance).  Again this could be either accumulation or distribution but it is starting to look a lot more like accumulation.  We can take clues from the SPY candlestick chart below (last chart).  The move to the 10dma was transacted on an increase in volume.  This could of have been viewed as supply entering the market but when the 10dma failed to break and with today's move higher it looks to have been the large players accumulating from the weak hands.  I'm assuming the large volume had something to do with the FOMC meeting minutes that were released that same day but who knows and who cares.    Today's close was decisively bullish as we closed near the highs.  However, as we mentioned prices did move back to the top of the trading ranged so we are at an inflection point here.  Just remember the longer we stay in the trading range and the more volume that is transacted the larger the resulting move once the range is broken.  This should be interesting should we continue higher and back to all time highs.  I just want to hear more people talk about a crash as we move higher as I find it funny.

Thanks for reading!

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