Trading Psychology Edge

I know it is not the end of the month yet when we usu­ally look at the monthly charts, but the last two weeks have been remark­able in my expe­ri­ence in trad­ing the mar­kets.   I have posted a monthly chart of the cash S&P 500 index.  All I can say is WOW!

Monthly S&Ps

This monthly chart goes back about 20 years.  Since 2000 when we made a then all-time high of 1552.87, we have been trad­ing in a large, decade-long trad­ing range.  I think the trad­ing dur­ing the last two weeks has deci­sively bro­ken up and through that trad­ing range.

Although we can still get a top rever­sal and UpThrust the 2000 — 2007 highs, I see that as hav­ing very low odds.  The strong move up so far this month after two months trad­ing above the resis­tance level speak strongly bull­ish, to me.

Oil & What to Look for Next

Part of this bull­ish­ness is cer­tainly due to the Fed pump­ing huge money into the mar­kets.  But I also see the so-called ‘shale oil rev­o­lu­tion’ chang­ing the fun­da­men­tal dynam­ics of the  mar­ket.  The US is no longer depen­dent on the Mid­dle East for energy.  We are expected to become a net exporter of oil in the near future.  The cost of energy is expected to drop sub­stan­tially from today’s prices.  That can only be bull­ish for the US stock mar­ket.  Click this link if you aren’t famil­iar with the topic: US Shale Oil Rev­o­lu­tion.

So the charts and the fun­da­men­tals are in align­ment.  We will, of course, watch the next pull­back care­fully.  We want to see con­fir­ma­tion of the bull­ish­ness via low vol­ume and nar­row spreads.  (After all, we are Wyck­off traders, not fun­da­men­tal­ists).  If we get that no sup­ply pull­back, then we have clear air overhead.

Free Webi­nar This Tues­day (May 21)

On Tues­day at 4:30 ET, we will be hold­ing a free webi­nar.  This one is a lit­tle dif­fer­ent.  We will go through sev­eral mar­kets where you decide whether it is a good buy spot, a place to sell, or a spot to stand aside and wait for fur­ther devel­op­ments.  I think you will not only enjoy it, but learn quite a bit about read­ing the charts.  Come join us by reg­is­ter­ing below.  We will send out a set of charts that we will be using in the webi­nar.  I look for­ward to see­ing you Tuesday!

Reg­is­ter for: Chart Read­ing Challenge

Our hearts go out to Boston, the marathon­ers, and the crowd cheer­ing the runners–especially those wounded from the bombs and their fam­i­lies.  As I am sure you have heard, two bombs blew up at the fin­ish line of the Boston Marathon yes­ter­day killing three and wound­ing over 100 run­ners, spec­ta­tors, and race vol­un­teers.  Many lost limbs and sev­eral remain in crit­i­cal condition.

Boston is the ‘big city’ where we live in New Eng­land, with a rich his­tory from the ear­li­est days of of the found­ing of Amer­ica.  Yes­ter­day was Patri­ots Day — a huge hol­i­day in Boston cel­e­brat­ing the start of the Amer­i­can Rev­o­lu­tion­ary War that began in Boston (memo­ri­al­ized as the “shot heard ’round the world” in Ralph Waldo Emerson’s ‘Con­cord Hymn’).  Vir­tu­ally every­one in the city (and many in New Eng­land) celebrate.

The bomb­ings took place right by Cop­ley Square in the Back Bay area — a beau­ti­ful and his­toric sec­tion of the city with some amaz­ing archi­tec­ture.  I’ve been there many times and know it well.  It is hard to see some of the pic­tures of that area now.

Once the news hit the inter­net, of course the mar­ket fell.  But it was already falling well before the bomb­ing occurred.  The down­draft just got accel­er­ated, help­ing to sus­tain and amplify the trend day down that was already in progress.

I had been see­ing sup­ply com­ing into the mar­ket, but was pre­ma­ture in see­ing a turn (see this post: Is the Mar­ket About to Pull Back?).  But the sell­ing was evi­dent.  Yesterday’s down­draft was quite large.   It was the largest down day since the Octo­ber 2011 lows.  Vol­ume was also large, but not the largest since then.  In any event, with the emerg­ing sup­ply seen in back­ground, the mar­ket has turned neg­a­tive, at least for the near-term.  I will be watch­ing care­fully how this cur­rent week devel­ops and then closes.

The lev­els to watch should be obvi­ous: the 1530 area will likely be tested.  Any rally from that point will likely have dif­fi­cultly with the sell­ing seen yes­ter­day.  A break below 1530 would likely take the mar­ket down into the 1480 — 1465 level.

One thing I will be watch­ing over the next few weeks is the area between 1530 and 1570.  This is where I saw early signs of sup­ply over the last 4–5 weeks.  If we start trad­ing in a range between 1530 and the 1570/80 level, we could be set­ting the stage for a larger area of dis­tri­b­u­tion, and, of course, a larger reac­tion.  But that is spec­u­la­tion at this point.  It is just some­thing to be aware of.

The US Stock mar­ket as rep­re­sented by the S&P 500 futures (ES) had a good rally last week.  It over­came the very heavy vol­ume of the prior week.  The weekly closed firm and the monthly chart painted another bull­ish bar for Feb­ru­ary.  Over­all, I con­tinue to see strength in the upside for the longer-term.  There has been no sig­nif­i­cant sup­ply that has come into the mar­ket.  The heavy vol­ume seen dur­ing the wan­ing days of Feb­ru­ary sug­gested sell­ing enter­ing the mar­ket, but this was quickly erased by aggres­sive buy­ing.  The pull­back into the low of 1481.75 acted like an ordi­nary shake out, albeit one with abnor­mal volume.

While the mar­ket is poised for higher prices, we may see a pull­back early next week.  Friday’s action, although paint­ing a bull­ish daily bar, showed more rota­tion than trend­ing dur­ing the day.  I am also not­ing some short­en­ing of the thrust, a reduc­tion of vol­ume on the rally, and lack­lus­ter mar­ket inter­nals.  Buy­ers may be unwill­ing to chase prices higher with­out first test­ing the late Feb­ru­ary high vol­ume.  A reac­tion back down towards the high vol­ume lev­els around 1420–25 would not be a sur­prise.  Any fur­ther rally up towards 1550 on light vol­ume would be sus­pect and could trig­ger a reac­tion.  Alter­na­tively, a lower intra­day high could also send the mar­ket lower.

A strong drive up and through 1550 would can­cel any reac­tion.  In that case, we would rea­son that buy­ers just aren’t con­cerned about sup­ply and we would look for a trip up to the all-time high made on Octo­ber 11, 2007 at 1576.09 (cash mar­ket).  The Dow did this last week, clos­ing above it’s all-time high