Saturday 15 June 2013
Charts are not predictive in nature, rather they are instructive on how to best prepare and get an edge when deciding to enter into a position, [or exit one]. It is of the utmost importance to have a game plan in place, beforehand, otherwise, one is relying upon factors more emotionally driven than fact driven.
The function of reading a chart is to gain insight from the most reliable source available, the market itself. What a market does is generate information that reflects the outcome of all source decision-makers, from the most highly informed and experienced to the least informed and weakest, with varying degrees of skills in between.
We know that “smart money,” [a term to describe dominating forces that move a market], is always active at high areas, distributing, and low areas, accumulating, with occasional participation in between. They are deft at hiding their “hand,” as it were. However, there are clues they cannot always hide as they leave behind “foot prints,” or a trail to follow, if one chooses to do so. The biggest clue comes in the form of volume.
High volume bars, especially at highs, lows, and important market turning points are created by them as they take positions. The other side of their trades are the public and less skilled participants. When you see such high volumes at these turning points, it is usually a transfer of risk from weak hands into strong hands. Rather than guess, predict, or rely upon gut feel, [emotion], it is better to follow their lead because they ultimately are the trend setters, literally.
Clues can always be found in the charts. Last month, May went into new high territory, but the close was mid-range the bar on a strong volume increase. Markets have much more logic than people realize. The increased volume is created by smart money. It is the public that reacts to it, almost always to their eventual detriment.
Applying logic, we see the market is at new highs. It is axiomatic to state that smart money, [SM], sells highs and buys lows, so it is no stretch to infer SM is actively selling at this current high level. The fact that price closed mid-range tells us that sellers were meeting the effort of buyers, sufficiently to keep the close from being higher. The public see price is breakout out, above the previous 2008 swing high, so they “jump aboard,” not wanting to miss the market going yet higher, or so they believe.
It also worth noting that this selling activity is occurring at the previous high, actually, just above it, making it look like a potential breakout, [SM is big on false appearances]. Price stopped at the overbought TL, [Trend Line], as well. There is a converging of a few important observations that raises one’s level of interest.
Few market participants pay any attention to higher time frame charts, like a monthly, but a monthly is not used for market timing, anyway. Timing goes to the daily and intra day charts, once the monthly and weekly provide reasons for doing so.
The KISS principle at work. Rather than focus on too many things, there is one factor we can take from the weekly chart, and it may prove critically important. For sure, it alerts us to a change in behavior not seen since the bull market began in 2009. It is highly unlikely that the public, and even many smart traders, would pay attention to this subtle change.
It is the first time that volume has increased as the market sells off from a high area. Most often it is an indication of a transfer of risk: strong hands taking profits and selling to weak hands, eagerly anticipating higher prices.
Some things never change, and noting those changes can be rewarding.
The OKR, [Outside Key Reversal] high is a shot across the bow, a huge red flag when the other noted factors are added into the mix. There are no accidents in life, not even in the markets. Everything happens for a reason.
The May high has a possibility of being a top. The one caveat we personally hold is that this bull market has been Fed fiat-driven, actively managing the market for economical and political reasons. Economically because the Fed is keeping its fiat-house-of-cards afloat and does not want the market to come crashing down, exposing its fiat-Ponzi scheme.
Politically, the Obama regime does not want to world to crash the fiat Federal Reserve Note Ponzi scheme, [Federal Reserve Notes are issued by the Fed and incorrectly called “dollars.”], and force Americans to realize the lies and deceptions since the Federal Reserve Act was introduced in December 1913, oddly enough, two days before Christmas when most of Congress was home on holiday. This is another story, but more important than 99% of American can fathom. It is what is impacting the markets, today.
The two strong reversals off important support is the market’s way of letting us know that buyers are defending support. Will they succeed is the all-important question? The last rally attempt failed as a retest of the May OKR high. Will this resistance hold, for it is an important piece of information?
We started off saying charts are informative, not predictive. We do not have to know in advance what this chart, and the others, are saying. For now, we are seeing a flurry of red flags to be defensive in participating. This daily chart is telling us to sell out longs or at least place close stops to protect existing profits. For any positions with losses, this is a huge warning to take them now before they become larger. For obvious weak stocks, taking a short position should be considered, always depending upon one’s rules and market objectives, profit being the ultimate one.
Wednesday’s sell off on increased volume was a strong warning, [3rd bar from the end.] Thursday’s rally, [next bar], erased the downside effort of the previous day, but it failed to elicit upside buying, and it stopped under the failed retest.
For now, as long as the retest swing high holds, selling against it would be the order of the day, but only when there are indications to sell. What are those indications? They would be your rules of engagement. If the market does this, then do that, and always in that order. It is how to stay in sync with a trending market, in whatever time frame chosen.
The tech-heavy NASDAQ is showing a little bit weaker, another red flag. You can see how the trend is no longer up, once a lower low occurred after the most recent lower high, as evidenced by the line connecting the swing highs and lows.
The rally attempt on Thursday did not erase the previous down day, like it did in the S&P, and each bar since the failed swing high, [not marked, but 5 bars ago], has been a lower high and lower low.
What the daily charts are telling us about the market and the higher time frames is that the potential for an end to this bull run is increasing. It has not been confirmed on the higher time frames, but the daily is serving ample warning for anyone willing to observe.
There are no Black Swans in the market, just people unaware of being unaware.
Saturday 15 June 2013