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Message of the Markets? Failure

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Yesterday 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.

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MINYANVILLE ORIGINAL Ever since the power reversal on November 29, a trader really didn't have but one choice -- to be long equities. A test of anchored support back on that fateful day clearly indicated that the demand was greater than the supply. The result was a market that has crawled higher ever since.

Yesterday we arrived at the next set of tests -- the next opportunity to measure supply and demand at a place on the charts where significance was previously shown. It's at these junctures where a trader can listen to the market to see what it is thinking. The message I got was failure. There was a little bit of ambivalence, but overall we witnessed test failures across the board.

Starting with the real strength of late, the Russell 2000 (INDEXRUSSELL:RUT) as exhibited through the Russell 2000 iShares (NYSEARCA:IWM), yesterday'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.

(Charts courtesy of stockcharts.com)



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 (INDEXSP:.INX). Here, too, there is some question about true intentions with yesterday'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: Yesterday 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.

Twitter: @tatoday
No positions in stocks mentioned.
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