What is the message of the market as the week, month, 2nd Qtr, and first half of the year
just ended? The second half of the year is likely to prove more troubling for the Bulls. We
do not make predictions for a future that has not yet happened, but an assessment on what
may unfold for the remainder of the year is about to begin on a weaker tone, based on the
developing market activity.
All of the available news, information, data, fundamentals, technicals, from any and all
sources eventually gets translated into the market as the driving force[s] that create the
trends and trading ranges. Everything gets distilled into a bar chart, showing a high, a
low, and where the final closing price occurred. An important add-on to that critical
information is volume, the energy, or lack of energy behind each and every market move,
in all time frames.
Yes, yes, it seems so basic to state, but the information to be gleaned from reading bars
and volume escapes the majority of participants. Ironically, the ultimate message of the
market, the most reliable source of information receives the least amount of credibility.
Fundamentalists treat charts as an amusement. Technical analysts try to harness the
market’s energy of information into some formula, imposing past tense indicators onto
present tense activity, and expecting accurate future direction.
This is not a review lecture of various forms of market analysis; rather, it is context for
understanding that the markets have an incredible amount of logic in the messages that
everyone gets to see, for those who so choose, that eliminates all the noise and perhaps
the weakest link common to us all, emotion.
The high, low, close, and volume generated by the market is totally void of emotion. The
market just is. Any emotion comes from the viewer/reader of that information. If one
were to follow the market’s lead, instead of trying to predict what it may or should do, the
results for success can improve dramatically.
To chart context we go.
The long-term trend remains up. Factually, there has not been a market turn in price on
the monthly chart, as yet, from an objective look at where price is, still near the highs.
What we want to do is read the logic of price and volume activity. Last month, price made
a new all-time high and closed in the middle of the range. If you look at each bar, since the
2008 low, about 90% of them had a close near the high of the bar’s range.
A close at the high-end of a bar indicates who is winning the “battle of the bar,” between
buyers and sellers. Buyers have been in control of this market since 2008. Why is the
close for May mid-range the bar? The market is telling us sellers were meeting the effort
of the buyers, a draw between the two forces. What is interesting to note is that the draw
occurred at the highest level of the rally.
Aren’t buyers supposed to be in control at market highs? It has been that way for the past
five years! The question it begs is, why is the market showing a change in behavior at this
critical juncture? We do not need to know the fundamentals. We do not need to know the
market is above a series of moving averages, [past tense, and lagging information]. We do
not need to view RSI, MACD, Bollinger Bands, you name it. None of them addresses what
is developing right now!
June just ended, and we see a similar bar that also closes mid-range. Do both bars mean
the same thing? No. Why not? Look at the volume for June v May. The composition
of the internal makeup between the two has to be different, based on that observable fact.
Monthly bars are for context, not for timing. To get a better read of the June activity, we
need to see the nest lower time frame, a weekly chart.
A line has been drawn to connect the swing highs and lows to get a view of the overall
trend without the “noise” in between. We can now see the composition of the monthly
June bar, and it shows the largest weekly bar was to the downside with a low-end close.
That factual observation has a negative connotation. When you add to it the volume,
the highest weekly volume in over a year, the market is telling us that the increased
energy was to the downside. These are indisputable, objective facts.
The last bar, last bar of the month, was a rally. An objective comparison shows it is
smaller in range than the previous down bar, [less ability to rally], and while the close
is at the upper end of the bar, [buyers "win" the day], it did not close much higher than
the weaker bar, and compare the close of the second bar to the close of its preceding
close. There was a greater distance down than there was up, in the last bar.
Finally, note the sharp drop in volume on the last weekly bar. Demand lessened on the
rally effort. What happened to the buyers? This is a red flag, a warning. The trend of
the monthly and weekly charts remain up, but the internal character has weakened.
The clustering of closes from March and April acted as a support when last week’s low
retested the 1550 area. There is still bullish spacing, where the current swing low remains
above the last swing high. What we need to watch more closely, moving forward, is how
future rallies develop. Will volume increase, or not? Will the closes be strong or weak?
We turn to the daily to see how its details reflect the content of the weekly.
Connecting the swing highs and lows, the daily time frame shows lower highs and lower
lows, the essence of a downtrend. The smaller time frames show faster developing market
activity than the higher time frames, and changes in the lower time frames occur before
there is a change in the higher time frames.
The downtrend on the daily justifies the red flag warnings on the monthly and weekly
charts. It is a read of the three different time frames that tells us the market looks to head
lower. The strength of the higher time frames takes more effort to turn them, so we can
expect more rally efforts, rather than an immediate decline underway.
What we can look for, based on developing market activity, is stronger declines and
weaker rallies. Plan accordingly.
As an aside, last Thursday, we issued a potential short trade alert in the S&P to our blog
subscribers, IF what we saw developing confirmed expectations, http://bit.ly/19KEwew.
We did it as an exercise to demonstrate one does not need to predict the markets, but to be
prepared for what follows developing market activity up to the point of making a decision
to buy or sell in the market[s].
If a signal occurred, and the trade work, it was known in advance for specific reasons and
not in hindsight. We were looking for a weak rally that failed. Our preparation worked,
in that aspect, because it kept us out of a trade potential that then became questionable.
What developed was market weakness right from the start and not a rally. Price then
vacillated the rest of the day, but there was no reason to sell, based on developing market
activity. The emotional element that plagues us all was removed, based on preparation
and the lack of a reason to execute.
Price did sell off at the end, unexpectedly, but that is a somewhat different story. Turns
out, we had a similar set-up in 30 Year Bonds, a trade we did recommend making, and for
the reasons similar to those in the S&P alert.
Those who remain long in the stock market are getting red flag messages. They should be
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