Chart Games

2009-07-18

Trading Week Review 7/17/09

Filed under: market commentary, technical analysis — Andrew Rosca @ 15:07

Wow. What a week. I had discussed in previous posts why the next leg would be up but didn’t for a second imagine it would be so energetic. The frustrating part is that we are back in a mode of bad news = strong market which has been so puzzling in May and June. Unemployment continues to rise and there is no recovery in sight. Is the public really so oblivious to the flawed logic and propaganda we get indoctrinated with every day? (Rhetorical question.) Everyone is focused on the fact that the number of new jobless claims has declined, ignoring that we CONTINUE to lose jobs every day. This translates to reduced revenues for businesses and government alike, with very far reaching and long term implications, including lower earnings for publicly traded companies. What’s driving this market higher?

Part of the answer lies in the fact that there are very few participants in the market. Participation is not to be confused with volume—a small number of players can generate very large trading volume if they have sufficient resources. Low participation however leads to an erratic market where an interested party can easily place targeted bids to drive overall prices higher. Conspiracy theories aside, this is what the SPX looked like Friday on a 1 minute chart. I would like to point out the last hour of trading in particular. Draw your own conclusions.

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Anyway, why the market has been going up so much last week is somewhat irrelevant. We stalled right at the yellow resistance line at 945 that has been on my chart for many weeks now and in retrospect (hindsight is always 20/20, right?) we constructed a textbook head & shoulders pattern. Odds are we will see a large decline Monday. Unfortunately I am already heavily short since Wednesday, when we breached my descending channel (gray lines on the chart below), and so I didn’t have enough (risk-friendly) resources to add to my short positions Friday, but I believe this is a fantastic opportunity to get short. Nothing in my long term outlook has changed and I still hold that the highest probability is for a move down to below 850, to 830 and possibly 800.

The only caveat is that a drop to 887 or 880 would construct an INVERSE head & shoulders pattern (dark blue line below), which would be bullish. I will re-evaluate things at that point but either way the next leg should be down from here. Once again every technical indicator in every time frame screams “overbought.” Then again, this isn’t the first time I’ve been fooled in the past few months and the market has a way to surprise us ever time. We are headed into a week filled with earning announcements from Apple, Microsoft, IBM, and many others. Brace yourselves for a bumpy ride (down?).

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2 Comments »

  1. Volume has been small since June. Sell in May and go away?
    I agree that low participation is what causes the market to be erratic.
    That and the traditional weak/terrible third quarter and the obvious overbought situation will conspire to drag the market down. Whether it will stop around 880 is anybody’s guess.
    My feeling is that we won’t visit 680 again. But low 800’s is quite possible.

    Comment by Irrational exhuberant — 2009-07-19 @ 20:06

    • I just read an interesting blog post by Doug Short that addresses why we might go below 800 from a non-technical perspective. I was going to paste the link here but now that you brought it up I’ll just do a post on it :-)

      Comment by Andrew Rosca — 2009-07-19 @ 22:22


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