Broken Record

Repetition of the same thought or physical action develops into a habit which, repeated frequently enough, becomes an automatic reflex.Norman Vincent Peale

I know this blog, now only a month old, sounds like a broken record.  Supply and demand, support and resistance,  volume, <insert offensive comments>, blah blah blah.  However, the quote above is exactly what I'm shooting for.  Just like a good athlete that practices the same moves and set ups over and over again until it is second nature to them when the opportunity presents itself they don't have to think about it they simply react.  This is analogous to a good trader.  The best part is you don't have to be perfect you just have to be good.  Good traders just like good athletes can perform under pressure.  More importantly they believe in their abilities and react automatically to the setups they have studied and seen a thousand times before.   Imagine if Michael Jordan paused and wondered if he should shoot or dunk each time he was passed the ball with only seconds left on the clock.

The three day rally that ensued was no surprise and where it hit resistance is even less of a surprise.  I had been expecting some type of rally based on the large volume seen on the recent down move.  I saw that as a transfer of ownership from the weak to the strong handed market players.  We saw the importance of the 1594 area acting as both support and resistance this week and watched as it broke and tested this area before rallying to a high of 1620 this week.  But why did it stop there you ask?  If you look at the daily chart of the SPX below you will see that on Thursday both the 50 day and 20 day simple moving average converged right at 1620.  I spoken extensively about the importance of the 50 day moving average (dma) on this blog as well as the 20dma.  You can read these bits of brilliance here.

To have both moving averages converge at the same point would have been a great opportunity to assess the potential of either reducing longs or adding shorts. Also note that we had a bearish cross over of these moving average not seen since November 5th 2012.  Just saying.  However, remember the larger plan here or at least one of the many set ups I believe may transpire.  We have had a relatively large volume  downmove with a resulting low volume up move.  I view the large volume as bullish especially considering it happened in and around major support levels.  However, before I can believe the market will continue to move higher I would like to see a test of the high volume area between 1576 and 1594 on lower volume and of course with these support levels holding.  Why?  Because the low volume test would signal to me that there is a lack of supply and that the previous high volume area was indeed a transfer of stock from weak to strong hands.   So lets see what happens next week as it should provide us some good opportunity.  The market is ready to pass you the ball are you going to be Michael Jordan or Sun Yue?  Who is Sun Yue?  Exactly.

Thanks for reading.

Principles

Important principles may, and must, be inflexible. Abraham Lincoln
Obey the principles without being bound by them. Bruce Lee

I am not sure which one the above quotes resonance with me more.  Abe Lincoln, a champion for human liberty remained steadfast to his principles even in the face of adversity. Or Bruce Lee who kicked Kareem Abdul Jabbar in the head.  Regardless of which one you shape your life by the fact is each were successful by following or obeying (as Bruce put it) their principles.  This is what this blog is all about.  Big love and principles.  The principles of supply and demand that I keep yammering on about remain the same regardless of the time frame we are looking at.  However, the principles that may not be readily apparent on the a higher time frame may appear crystal clear on lower time frame.

To demonstrate the point, yesterday we spoke again about the importance of the 1594 support and resistance level.  Yesterday it acted as resistance.  Today is was support.  If we look at the daily chart we know that the low for the day was 1594.94 but doesn't really demonstrate the principles.  The lower time frames reveals much more about and better demonstrates the battle of supply and demand.  The SPX 30 min chart below shows that price gapped up above the 1594 area at the opening bell today followed by a decline back to the 1594 area (1594.94) before the lunch time rally began.  Resistance was clearly broken at the open but it was the test of that broken resistance which was subsequently confirm as support which would have given me the confidence to go long.  What do i mean by 'confirm as support'?  We define support as an area where demand overcomes supply,  If price moved back to to the area of broken resistance and continue lower accompanied by higher volume then we know that supply was present and overcame demand.  That level would once again be considered resistance.  Instead what we saw today was price falling back to broke resistance on lower volume with the 30 min candlesticks closing off their lows as price approached the 1594 area.  This indicated that either demand was present or simply supply was lacking.  Either way demand was winning the battle at the 1594 level and a rally ensued.  Simple right?  Now try to do it in real time.  Big love for all!

Thanks for reading.