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.