Wednesday, May 27, 2009

Back and forth

Well, we had quite a run on the first day back from a long weekend. The market was ripe to take out the 880 on this 4th attempt just to fail yet again and come in strong to break into the 900 with a very bullish close. There was no looking back after the morning action and the market remained in a very tight range without any pull back.

The bulls have the upper hand now and here can make their stand to break the lower high pattern to take us to a new range. Price action yesterday was very strong indicating further continuation at least in the morning hours. I had mentioned that bearish indicators fail to give bears the signs needed. The bulls have consistently managed to drive prices higher even with many bearish divergences developing. This has been the game for the past 2 months and has not yet changed. To further support the bull case the past 3 weeks have been a great sign of distribution to absorb any sellers and remove many of the overbought conditions.

Bears on the other hand continue to manage new buyers and do not allow them to break our previous upper ranges above 920. Bears have broken the uptrend for the first time during this rally with strength and continue to dominate on the upper ranges with selling. However follow through on key support ranges is lacking and any attempt at breaking support will induce short covering and new long plays. Long term long positions carry great protection and the bears have yet to drive fear into many longs.

Support and Resistance

936-938 = indicating a new high and of course major resistance. Expect a sell off from this range to bring you back into the low 900 range.

923-924 = the previous attempt we have made on the upside after visiting support. A retest here should give some pullback but should be setting up for a new high

917-918 = the bears need to make a fight here and cannot allow prices to continue higher. Any break of this range has a potential to go all the way to the 930+ range. So watch volume and momentum carefully on this break

910-912 = previous close and key price point

907-908 = combined with the 910-912 this range has been an important turning point and a range to allow distribution to take place. So watch this range very carefully to be able to differentiate between distribution and or buying/selling for a new range.

902-903 = as mentioned the bulls broke through yesterday with strength and will continue to defend this key range here. A break to the downside will bring us back to 880. The bulls cannot let this range fail or the chances for a break on key support become very high.

Trade Plan
Trade plan for today is sit and watch. We had a strong price move yesterday and we need to wait to let the market show us direction. Did we built a base to enter a new trade range on the upside or is this the last attempt of the bulls before we end this rally.

Side note
It is rather interesting to compare this bear market rally to previous rallies. There are some key differences - differences that have already started to put doubts in my mind in terms of the direction for the next few months. Bear market rally tops are swift and bring fast reversals. This has not yet occurred here and could be an indication for the longer term of this market. There are not yet enough signs for me to invalidate my outlook for the year but the bullish patterns are making a strong case here.


  1. Chris-

    New to the blog and have really been enjoying your daily comments. One question...I've read from a lot of other bloggers that bear market rally tops are slow to develop and can take time as opposed to bottoms which are quick and aggressive. I saw this morning your comment that bear market rally tops are quick...just curious if you could clarify...Thanks -Mike

  2. Mike, welcome =)

    That is exactly why I made this comment here. I read the same statement and wanted to clarify that my views are a bit different there. Take a look at the last few rallies we have had in the past 2 years. It is very clear that the price in the topping range - lets assume 30 points for this - is very minimal with fast reversals.

    We want to make sure we separate bull market tops and bear market rally tops here carefully. If you are a longer term reader you may have caught my comments on the bollinger bands. Bear market rallies can very possibly touch and even breach the upper ranges of bollingers - HOWEVER - they need to move away from that range within a day, at most 2. This has not occurred here. After the first breach of the upper range bollinger we remained there for 3 consecutive days and are now finding ourselves back in the upper ranges (30 points off the top). We have traded way to long in this upper range here for this to be a "classic bear market rally top".

    However, the last 2.5 months have been quite different from previous rallies. New rules are written and I have to admit, contrary to what others may say, we are a bit in uncharted waters here and can easily make a very strong bullish case out of what has occurred. I am still not a believer of a new bull but as mentioned before - long term bear markets will get this 6+ months type of "bullish" move during the half way point where everything seems ok - I believe we are not quite there yet but more signs are emerging that are shaking my very bearish views.

  3. there is also another point in regards to tops and bottoms. I may make another post on this tonight as its kind of hard to explain.

    Let me try explaining first, if it makes sense let me know, if not I will post charts.

    When the market is dealing with a strong resistance point on the upper ranges that it attempts to break we will see consecutive tests at this range with uncontrolled/impulsive sell offs that find support at various ranges but will always lead back to the same upper resistance range. When this occurs the chances of a break of this range are very high.

    This is not occurring here, we have quite the opposite. After our first run towards 930 we have been dealing with the same support range at 880 with uncontrolled and impulsive buying moves that stall at various ranges (924, possibly another impulsive move now that may stall anywhere from here to 924). The key is that we have consistently retested the same exact support range of 880 whereas the opposite moves have been to various other ranges - almost uncontrolled (many divergences for volume and other indicators).

    So taking this into account, the chances are a lot higher here that the market is setting up for a break of this important support and NOT for a break on the upper ranges. If we were working on a break of the upper ranges we would be seeing similar action as last month when we kept on testing 870-880 with impulsive sell off moves towards various support ranges (never the same).

    So in summary - I favor that the market is setting up for a break of the 880 and NOT a break of the 930.

  4. I know its early and only 30 minutes into the trade day but we are currently moving between the 907 (907.02) and the 912 range (911.65).

    Its looking like distribution to go higher. Positive ticks and above VWAP.

  5. strong reversal on price, ticks, volume. This up move looks like it was a fake and we continue back to 880. Have to be careful here at key ranges.

    I am still 100% cash but looking to get in soon.

  6. high probabilities for more downside from here. Distribution taking place to go lower at this point. Should top out at 910.75 from here and then go for 902-903 first before making a final call.

  7. chris thanks for the comments.

    do you see us breaking to 880 if we move down from here?

  8. if we make a move below 898, I am very confident that we will break 880 this time around.

  9. good stuff...thanks for the good explanation of tops and bottoms...-Mike

  10. are we there? it looks like we will break 898 today or tomorrow, which will be a big down day.

  11. important test now for the bulls. 902 is a key range here on S&P

  12. The indian guru is calling for 10 to 12% drop ; ENJOY

    Today is selling time on rise - Major corrections in commodity markets, Dollar will be one man show from here..get out from index and metal stocks.. Wednesday, May 27, 2009

    Dear Members,
    Finally, Yesterday our wave of nature theory gave indication of bottom out US dollar though it gave up all gains after economy data released but still we are very much sure that dollar is moving ahead from today. We will experience one of sharp recovery in USD from here 80.17 so those who remained away from dollar shouldn't miss this opportunity of buying. Sell Euro and Swiss Franc and commodity currencies.

    Tuesday is the day of Mars, and we expect sharp fall in commodities from here. In the next fifteen days gold, silver, grains, oil and other commodities should fall around 18 to 28%. Take this opportunity of trading as these kind of trading opportunity doesn't come again quite often.

    Stock Market will top out today, sell all major indexes, sell metals and commodities stocks. We are expecting 8 to 12% fall in all major market in the next two weeks.

    At the time writing this update gold is trading at:
    Gold $950, silver at $14.52, copper $2.1280, Platinum 1145 (should fall 8% with in a week)

    Oil is at $62.48, Heating oil $1.5420 and RB gas $1.8630 (should fall 15% in ten days)

    Soybean at $1190, wheat $614 and bean oil at $3780 (Should fall 20% in three weeks)

    Dow is at 8475 and other markets are yet to open but take a opportunity of selling (sharp correction around 10% in two weeks)

    US DOLLAR Index is trading at $80.18 (we expect 83.80 during this week)

    Euro is at 1.3970, Australian 0.7844, Canadian 0.8960, Swiss Franc 0.9217 (all these currencies should fall more than 5% during this week)

    Thirty year bond is at 118.15, our target is to reach 123.80 in the next ten days.

    We believe in our theory without any doubt of even 1% so time has come for traders to build position aggressively.

    Thanks & God Bless
    Mahendra Sharma, 26 May, 6.30 AM, Mumabi - India

    3:48 AM

  13. be careful with the 898 here. Not seeing enough volume around this key range for selling. Could be a fake 900 break to come in strong on the buying side.

  14. what's the call if we finish right at 900 give or take a couple of points?

  15. i GOT OUT OF spx puts to break even. was sweating because of time decay. I may be kicking myself tomorrow. other shorts i am holding.

  16. I'm bearish, but almost think being fully hedged or in cash is the right move until all the folks that buy every dip have given up. Confidence is sky high with the bulls and it's going to take something serious to really hurt their cause...

  17. it may happen tomorrow, we may see 860 or break of 875 that the whole world is waiting for.

  18. fully hedged or 100% cash is the best thing to do. Many of us (me included) are having a difficult time staying 100% cash, which is a bad thing. Its the "do not want to miss the move" type of mentality. When you have been invested short for a while and you exit you have the fear of the "recovery of funds" that you are missing.

    Its a bottomless pit especially with leverage that comes so easy from your broker.

    I have tried my best to stay properly protected and position managed but its difficult (2 months break even ... sigh). Its the ultimate test of patience here. Being trigger happy is acceptable when the market is moving into the direction you want.

    So whoever has that "recover money" and "must stay short of fear to miss the drop" syndrome please raise your hand.

    [raises hand in shame]

    Its such a beginners problem - yet here I am.

  19. yes my hand is raised. I am 100% cash now. I need to remind myself that you always get opportunity. No price is important as long as it moves in the right direction.

  20. Chrsi, 902-903 now a resistance? if we break 898 in the next leg you think we go down/

  21. not resistance yet. I have a rule of thumb of 10 point break minimum before a point turns from support to resistance or the other way around.

    Regardless of support/resistance. The market really wants to see me grow bald at an early age here. Quite frustrating to trade this way - which is a sign to just wait until the market becomes easier to trade again. Still want to know if this is just a mere illusion to me and the market is ALWAYS difficult to trade. Do not have an answer quite yet.

    Yes I am turning emotional again - how can you not with such a roller coaster ride here - and yes I know if you are a dip buyer you have nothing to worry about. You bought at 880 (for the 4th time) and are now sitting pretty watching the bears go nuts.

  22. another round or raising hands for being a worn out bear ....