We had the opportunity to measure supply and demand at a place on the charts where significance was previously shown. Aside from some ambivalance, we mostly saw failure, writes L.A. Little on Minyanville.com.
Tuesday’s gap up came on light volume as compared to the anchored resistance zone it is coming into. Volume 40M shares as compared to anchored resistance bars of 75M and 70M shares. This comes after a decent consolidation period and after a large run off the bottom.
The fact that consolidation was witnessed prior to the gap up says that price can move higher and more testing may take place. The flip side is that the supply and demand equation says that the probability of a failure and retrace is much greater than a continued move higher. I believe people’s pocketbooks, and at this price point, people do not seem willing to write larger checks in order to purchase more equities.
Moving on to the S&P 500 (SPX). Here, too, there is some question about true intentions with Tuesday’s move higher setting up an ABCD up pattern that could potentially take the index back to the yearly highs.
There’s only one problem: Tuesday was a test of anchored resistance, and it failed miserably. A failure is when you push into test and not only does price fail (that is, it’s unable to get over the resistance zone), but volume contracts, indicating less demand at the prior resistance zone. When this happens on the short-term time frame as shown above, it says that on this time frame price should retreat. That retreat may end up being nothing more than a fade back to prior anchored support and regenerate back higher, or it may be something more sinister. A retrace, though, is where the higher probabilities lie, and that is what a trader needs to expect.
Whether you tighten up your stops, take some profits, or hedge your longs with short positions, the message being relayed is that a pullback from these levels has a much greater probability than a continued push forward on this time frame. As a result, I flattened out my portfolio and raised some cash as well. It was another good run higher and I thank the market for being so generous. I’m just not at all comfortable that it will continue despite this being a positive seasonal time for the markets.
By LA Little, Contributor, Minyanville.com