S&P 500 for the week…
The broad market treaded water for most of yesterday’s session. We also saw a big fight between the bulls and the bears. The bulls and the bears can be likened as two equally powerful street gangs in a turf fight. The bulls tried to push the bears away and when the bears were cornered, they bounced back pushed the opposing force away. This push and tug fight between the two camps took place for most of the day yesterday. By mid-day it seems that the bulls (in red and green candles) are firmly in control. But a long and fierce fight followed towards the close and the bears (in purple candles) ended the day in control. (See chart 1 below)
Chart 1: NYSE Advance-Decline volume for 6 Dec 2006
What is more interesting about the recent market happened on 30 Nov. It was 3 days after the 27 Nov selldown and the SPX had already retraced all of its losses from 27 Nov. The SPX was at a pivot point. If it broke through and closed above the prior day’s close, the selldown would be merely a correction for the market to digest the recent steady gains. However, if it were to close lower than the prior day’s close, it would reinforce the 1400 area as a strong resistance. Neither happened. Although the SPX traded much higher and lower throughout the day, it closed only a whisker higher on 30 Nov.
This is a perfect setup for educational purpose. 30 Nov is what professionals call a ‘churning’ day, where volume is high but very little price action. One possible explanation for a ‘churning’ day would be that financial institutions are selling (which explains the high volume) and retail traders are buying (which explains why there is no drop in price). See chart 2 below. Only financial institutions are capable of transacting in huge volume. This is why looking at the volume is important for any technical analysis. Volume is widely accepted as the footprint of the smart money. Knowing where the smart money is headed and following them will enhance your trading profit. For the past 2 sessions, institutions are not actively participating in the market, which partly explains the choppy market we’re experiencing currently.
Chart 2: SPX daily
While it is good to know the technical explanation, it must be stressed that there are still many other factors and variables that are not taken or cannot be taken into consideration when doing a technical analysis.
Two important areas to look out for in the next few sessions would be 1400 and 1414 area. A break above 1414 with high volume will means that the uptrend is still intact and market is still bullish. A break below 1400 would be detrimental to the bulls and we will have to be more alert to any move below the lower trendline and the moving averages.
We have about 1 full week left before Dec options expire. We are currently waiting for a suitable time to close up our iron condor initiated on 8 Nov.
Good trading!
Gary
