Bears Making a Case, Burden of Proof is on the Bulls

Since November/December 2010 when the market cleared the all important pyschological hurdle of the whole number (1200), the bulls have ignored any suggestion of being overbought and overextended.  Trying to determine where the high resistance point lies and when the subsequent pull back will begin is like trying to determine when Kanye West’s next outrburst will occur…..you know it’s going to happen, you just dont when.

Looking at an hourly chart like an investigator, one can see clues that may be forming to give us Speculators a hint that the bears may be trying to make a case for control.   

On January 18, 2011 the market (E-Mini S&P) marked a two-year high at 1295 and was subsequently met with some type of liquidation.  I say “some type of liquidation” because the sell of was stealthy, but was rather oderly and did not present the look of a panic sell off.  After selling off and touching on a near term low (1267.50) on January 20, 2011, the market staggered off those lows to touch 1288 (no significant point of interest as far as I can tell). At this point, 1288 is a distribution point and the market needs to trade above and most importantly close above 1288 on the hourly.  The hourly chart (shown below) reflects a rejection bar at 1288 (21Jan), which signifies that there was no one willing to take the offer, therefore the liquidation, alebeit minor, resumed.   

At this point, the bears have made their argument: 1295 and 1288 are the highs they are willing to accept; the burden of proof is now on the bulls to make their claim that they are still in control. The bulls must clear and close above these highs.

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Searching for Answers(Levels)

Most technical oriented speculators are looking for possible levels the market may run into for resistance.  I say resistance versus saying looking for support areas because it seems the market keeps marking its support level as it goes higher.  We are well aware of the nearest downside gap (1270 area), as well as other downside gaps the market has left in its wake.  Those gaps will be filled at some point. repeat: those gaps will be filled. But for now, the market is streaking across the sky with “pick a number” in sight. Who the heck knows how high this market can go – we sure don’t, but throwing up a Fibonacci number on a weekly chart, it projects a possible target level of 1343 (see chart below).  What? 

The market has been in an accumulation mode since Spring 2010. The bears managed to bust up the accumulation pattern and it appeared the market would begin to test somewhere in the 900 area, but it found a support area at the 1004 level (ironically a Fib level). The market has not looked back since.

Wednesday’s (Jan12) price action gapped the market above the recent consolidation range; if the market opens gap down and moves below the former resistance level @ 1274 it will more than likely close the gap at 1270.  This will of course create an island top pattern. The island top is not a favorable condition for being long. Tomorrow’s session may give some hint to the answers we as speculators are in search of….

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Using Tools of Context to Determine Trader Intent

As Speculators, we use Tools of Context to assess the underlying “story line” of the market.  There are four tools of context we utilize when attempting to understand the sentiment (story line) of traders intent:  straight line support/resistance, accumulation/distribution, classical bar chart patterns, and divergence. 

Each of these tools, used independently and/or collectively, gives us a picture of where capital is being deployed in a certain timeframe.  We understand our place in the      markets — we do not move markets — therefore we must determine where the market-moving-money is being deployed so that we may follow. 

In the chart below, which is from Friday (07Jan11), we identified the market failing at 1265 and entering into a period of slight distribution heading into the lunchtime lull sesssion.  As traders returned from lunch, so did the bidders, which ended the distribution pattern (breaking the straight line resistance point) & marched the market higher into the close.   

Everyday, in everytime frame, the market tells us a story on where other trader’s intent lies.  We utilize these tools of context as well as other intraday trading techniques to aid in understanding the story. 

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Trader: H&S Top? Market: Nope!

The H&S top pattern we noticed on the 60M chart (all session) from Friday 31Dec10 is considered invalid by today’s price action.  As noted we were looking at 1257 as the point of interest. Obviously Monday’s (03Jan11) price action traded to higher marks, reaching to a high of 1272.50. 

Preferences and opinions don’t matter much to Ms. Market.  And in our opinion the market was setting up for a nice H&S top to signal a topping off of the market extension. Yes, this market is extended, but we have to trade what we see; not what we believe.  Since our opinions sometimes get in the way of trade executions, it made sense for us to steer clear of actively trading a market like today wherein the markets grinded higher with minimal pause.  We opted not to buy on the pullbacks, instead were looking for a point of weakness and for buyers to get off the bid. The price action took a breather in the 1272 area and finally decided to roller over and drift lower in the afternoon; trading as if she remembered she left a gap below at 1257.50. 

To us it would be a more comfortable trade if the market would avoid trading in these extended price levels at the outset of the trading quarter and find a basing area below to allow firm support to take root at lower (much lower) levels.  Quantitatively, six of the past first day of the year trading sessions show >+1% gains, with the next 3-week returns at  -1.4%, -2.0%, -2.6%, -0.1%, -10.6%, -3.1%. 

A look at the chart below, with price action kissing the top end of the projection line (drawn from a weekly chart), clearly shows the strength of the bids, but at some point a support level needs to be validated. We’ll take note of when she decides to go on the hunt for support.

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Facebook Surpasses Google as Most Visited Site in 2010

Talk about “speculative investments”….

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.    

Additionally, the article (link below), indicates Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

http://stk.ly/i0pI92

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Ending the Year with a Bang (and a warning sign?)

The market (of note: our market is the e-mini S&P 500) went out with a bang! and possible signal??  

The market gapped down on the open and slipped below our support line at 1250 to touch 49.50 if only for a brief second before trading in the gully of the 1250 – 55 range for most of the lackluster trading day.  The last hour of the session saw the most volatility in weeks.  Almost forgot what volatility looks like (I’m sure it’s on the way though….quiet before the storm as the saying goes).   At the end of the last trading session for the year two-thousand ten, the market fell hard for 3 points, only to come charging back up 6 points to print above our interest point of 1257.  In fact, the market closed at 1257.50, but the settlement was adjusted to 1253.  This adjustment may be very telling….

So why was 1257 our interest point? Well, this weeks lackluster trading session has managed to form a complex H&S top on the 60M (all session) chart.  In order for this H&S top pattern to be invalidated the market needs to close above 1257; as such, we should see her kiss 1260 and possibly move to higher marks.  The inability for her to close above 57 could be a sign the bulls have run out of steam and a near term top is in place.  For now the H&S top is still valid.  We’ll have to wait until next year to see how this story plays out….

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Leadership, Follow-er-ship, and Trading

What an awesome demonstration as it relates to the dynamics of leadership and follow-er-ship.  Who really is in control?  Who actually turns the tide from an idea to an overwhelming phenomena – the leader or the first follower? This demonstration can also be applied to the dynamics of trading and “the herd mentality”.  

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