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.

Time is money

You may delay, but time will not.

Benjamin Franklin

These are but two of many of Benjamin Franklin's famous quotes.  Actually, he has over 400 recorded quotes.  Benny sounded like a chatty patty.

Yesterday I spoke about the need to be patient.  Patient is usually equated with waiting.  Waiting means the passage of time.  Waiting causes anxiety in some.  I wonder if its our innate fear of time passing that causes us to be impatient.  Then we have quotes like 'Time is money' that place a monetary value on our limited time.  Or those of us that place deadlines for our success.  How many of you have already planned to retire rich from trading in the next 5 years?  Maybe this is what leads to so many bad trading decisions.  It is the need to profit quickly to meet our lofty goals essentially placing a great value on our time.  But enough of my Aristotle type babble and to the point which is you cannot 'time the market' in the sense of predicting when price will reach a certain level or target.  You must simply react when it does.

Yesterday I posted that should a rally ensue that the likely target would be the support turned resistance area of 1594.  Today's high was 1593.79.  Stop the applause please! Did I know that this was going to happen today.  No.  Actually I didn't know if was going to happen at all.  Support and resistance is not only where the battle of supply and demand has happened in the past it is also the 'time' to make a trading decision.  We react to these levels using the theory of demand and supply using volume - the main predictor of such behavior.

So why did price stop at 1594?  Price stalled at this level simply because supply overcame demand.  Plain and simple.  In order to break this resistance area demand needs to overcome supply which is the definition of support.  This is the reason why support becomes resistance and resistance becomes support.

So are we going to tank now?  Maybe.  Or maybe we simply move back to support (1578) and look at volume for clues for our next trading decision. Or maybe we break our predefined resistance area (1594).  Lets wait be patience and during this passage of time come up with some life changing quotes.

Thanks for reading.

Patience

How poor are they that have not patience! What wound did ever heal but by degrees?William Shakespeare

Beats me what the latter part of that quote means but I get the gist of it. Patience is important. As I stated so eloquently yesterday I was going to wait patiently to see how things unfolded before considering a long position.  Well the market decided to punish those that jumped the gun today by slamming the SPX 32 points lower before staging a midday rally.

I was asked the question after yesterdays post if we were at support or resistance since the market fell below the 1594 support area and rallied back up (after hitting 1578 support) to around this level at the close on Friday.  That was an excellent question and I can tell you with 100% accuracy that it was resistance after today's action.  Just kidding.  Nonetheless it is a very good question and the answer can be found by analyzing the lower time frames.

Below is the 15 min intraday SPY chart for the last 3 days.  We have labeled our support and resistance area that is in question.  The trouble started on Thursday when we broke support on increased volume.  Again in order to break support we need supply to overcome demand and that is exactly what happened.  Once support is broken it becomes resistance.  Why?  Because supply has ovecome demand which is the definition for resistance and also the requirement to break support.  See the connection!?

On Friday at the open, price gapped up to resistance and fell back until midday (something about midday and rallies?) when the market began to rally. You will notice that about 30mins before the close price again reached resistance once again before dropping for the remainder of the trading session.  Even the most naive of traders would consider that resistance.

So now what.  Well the market does look ugly and fear is definitely in the air. However, if we look at the daily SPY chart below there are a couple of things to point out.   First, volume has been decreasing on these down moves and the price is closing significantly off its lows. This signifies that demand is coming in during the session (apparently around lunch where the fat cats are too lazy to hit the sell button).  I believe patience is again required here before going long.  Although I continue to view the high volume as a transfer of ownership from weak to strong hands I would wait for a retest of this heavy volume area after a brief rally.. How far can we rally?  How about that area where supply overcame demand.  That is right ladies and gents at resistance which currently stands at 1594 level for the SPX and $159.6 level for the SPY.  With that in mind and with Billy Shakespeare's famous last words I say to you "Go get 'em champ!".

Thanks for reading!

Quickie 2

Well the markets are much more interesting to watch these days.  When I hear or read commentary that markets are too volatile it means people are scared as it usually only comes up when the markets move down.

So lets recap what has been happening.  There sure has been a lot of volume in the past 3 days on the SPX with a price range from top to bottom of 85 points. So traders where either leaking from their bottoms or erecting from their fronts depending on if they were long or short.  

Below is the SPX 30 minute PnF chart I posted last Wednesday.  You will see, as I have shown before, why 1594 area (blue area) is an area of support.  You can also see why 1578 is also an area of support.  If don't see why let me recap.  Significant areas of support and resistance are identified by large price moves after the support or resistance level is either broken or prices bounce (up or down) from these levels. In this case, you can see that 1594 acted as an area of resistance twice before it was broken and a large up move ensued. The 1578 area also acted as an area of resistance which was broken and then after been tested (column of Os) prices moved significantly higher.  However, it is clear that the 1594 appears to be a much more significant level these days.  If you don't believe me just draw a horizontal line on your chart and see what price has done at this level.  Keep in mind that with the current daily volatility of the SPX a 16 point move from support to resistance is a bit narrow but may still serve you well intraday. 

On Friday we saw prices drop to 1577.7 (just a 1 point off our mark) before staging a triumphed rally back to 1592.43.  With the amount of volume that was registered for the past few days I'm starting to become a bit more bullish as I'm viewing this as a large transfer of ownership from the weak hands to the strong hands (just remember even the Rock Biter was no match for The Nothing).  Although I probably would not buy right now as typically there is a test of this high volume area after a brief rally.  The rally could have happened intraday which means we should see a drop back to 1578 area soon or Friday's daily candlestick could be the start of a brief rally before a possible move lower to these levels.  It is on this possible retest that I will assess if a long position is prudent.  For now I continue to watch and wait patiently.  

Thanks for reading. 

Pump Up the Volume

Back in 1987 M.A.R.R.S released this groundbreaking track launching the age of house music and music sampling.  This song is made up of  over 250 samples! (I don't think I know 250 songs that I like).  1987 also brought the October 19 stock market crash.  Coincidence?  "Pump up the volume, rock the house, boogie down, here we go!" Could they be more blatant?  This is obviously some type of Morris code to large institutions around the world to sell the markets.  

Joking aside when I'm analyzing the markets I find myself viewing it as a big conspiracy theory to screw the retail traders out of their money. I find myself trying to determine what the large institutions intentions are by looking at my Morris code, Price and Volume.  I know it sounds flaky but fear and greed rule these markets and we humans are creatures of habit.  If you beginning to view the market not as a participant but as an outsider watching this psychological experiment known as the stock market unfold you will be quite surprised to see that the same human patterns occur time and time again.  

Raise your hand if you were long this market and found your underwear a bit heavier today.  To state the obvious, the market has been rocked in the past two days.  Today's volume on the SPY was the highest since May 18, 2012.  Its funny how the highest volume days in the past few years have all been on down days.  You can almost see the fear splattered all over the charts.  

Lets try to rationalize what lead to this nasty fall using the tenets of support and resistance, supply and demand as I have been yammering about since I start this groundbreaking blog.  Below is a daily SPY candlestick chart with our support and resistance levels I have mentioned far too many times to count. $165.2, $162.75 and $159.21 (see PnF below).

In order to break resistance we need demand to overcome supply.  On June 10th (first blue circle) price hit resistance on lower than average volume.  This indicated that there was no interest to move prices higher.  This lack of demand lead to prices falling thereafter.  The days leading up to this Wednesday's drop you can see price was moving up on decreasing volume again as it approached the resistance area of $165.20.  I won't deny that price broke the $165.2 resistance area however, I would have waited for a test of this broken resistance to confirm it as support.  That means I would have waited for price to come back down to $165.2 on lower volume (indicating lack of supply) and then a bounce above the high of the previous day ($165.99) before I would have been convinced the higher prices were in order.  Instead price tanked the next day on higher than average volume indicating supply entered the market with price closing near the lows for the day.  That was bearish.  Today we gapped below $162.75 and headed to he next level of support at $159.21 on very high volume closing near the lows of the day.

The close near the lows of the day is bearish/  Although the extremely high volume indicates a large transfer of ownership between the weak and strong hands (or what some call accumulation) has begun.  This may be the early stages of a larger drop to come in which we will look to see where the next support level it to prepare for a possible long position.  If these two last daily price bars and the associate volume had occurred after a well defined downtrend I would have viewed this as the final 'shaking of the tree' and would be more bullish.  If that were the case, then I would simply wait for a weak bounce from support and an eventual test of support on lower volume indicating supply has been absorbed.  For now I will just wait and see how things play out and tell you in hindsight how right I was. :) 

Thanks for reading

Note:  This is where the $159.21 support level came from.  Why? Significant move higher after resistance broke.

  

The Ben Bernack

Well I guess Benny said something today that the market didn't like.  Honestly, I try not to listen to the news and the gibberish that comes with it.  News influences people.  I guess this is why we have insider trading rules and regulations and the SEC to uphold these rules.  I wonder if they ever got around to talking to those Bear Sterns put holders that made off with $270 million just days after it collapsed back in March 2008.  I guess they were just lucky. This rant of mine is neither here nor there regarding today's market analysis but I'm sure it will manifests itself once again in future posts.

The traditional daily PnF chart below shows that 1640 is an area of important support and resistance.  Significant areas of support and resistance will lead to significant price moves if broken.  Otherwise the would not be considered significant.  Duh!

The 60 minute PnF chart shows a more refined area of support and resistance at 1643.  Refined means less margin of error.  If the 1643 level seems familiar it should as we spoke about this level here.   The nice thing about significant areas of support and resistance is that they don't change frequently but need to be tweaked occasionally for volatility.

The 5 min SPX chart below shows how price reacted around the 1643 area (red circles).  Yesterday when price broke above this area, price continued higher until it hit minor resistance at 1652.1 (Shown below). Today the SPX fell back to 1643 acting as support shortly after Benny's talk and continued to see much activity until it broke lower.  Price then dropped quickly as one would expect at a significant level of support and resistance.

15 min PnF chart with 1652.1 as minor resistance.

Thanks for reading