This week we came just shy of hitting our anticipated resistance of 1378 (missing it by 3 ticks) and headed south from there. We then hit our anticipated low (1359-1361), covering an entire weeks range in the same day.
One would have considered that kind of range expansion would lead to the establishment of a downtrend, however a barrage of positive reports and meetings resulted in a substantial recovery from those lows today. Tomorrow it is likely we will hit the 1378 level (for real this time) and make me right twice in one week :-)
Looking to the weekly S&P Emini (ES) chart, I am seeing we have not had one single week with above average volume all year. Typically, you'd like to see some volume associated with a rally. I have talked about this in past weeks, but it is worth reminding. There are many potential participants on the sidelines who are suspicious of this yet we have extended to a move of more than 100% of the first range comprised of the first 4 weeks (weeks that did have good volume) of the rally starting last October. This tendency suggests we are a bit overdone on the long side. This may weaken the bull some in the coming weeks. The monthly chart however projects into the 1429 area and looks a little healthier (excepting the volume situation).
Until yesterday, ranges have been narrow and intraday trading for trend following has been difficult. As a result, intraday counter-trending, or catching moves near support or resistance has been the key to profitable trading. Much of what is driving this market is news related and not the natural cycling we would typically see in a "freely" traded market. So the way you successfully trade in this environment will take these factors into account. As a result, try to think in terms of the larger perspective.
Another factor that is a change in perspective is, as we head higher, the profiles we typically use to measure support and resistance is pulling data all the way back to 2007. The volume has expanded so much since that time, the volume from that period is basically insignificant, so it is difficult to make projections off it.
Another analysis of volume we do is to look at trends in tick volume over bigger spans of time. For example. over the last two weeks, there has been net selling as the market has headed higher. So the S&P has gone 35+ points higher on net selling. That is something worth pondering.
In the meantime, the Russell 2000 has done nothing but consolidate over this time and is in a net downtrend as of this writing on a half day chart (which is a significant cycle).
Because of these factors, we urge caution on the long side.
Due to no reports tomorrow Friday 3/2/12, range trading is fairly likely as pushing above 1277 and to new highs will likely be difficult without larger participation.
Basic Support and resistance as of this time consists of 1380.50 to the upside and 1353.75 to 1358.50 to the downside. Though I am a bit baffled by the range expansion yesterday and no follow though- I am very suspicious that yesterday's price action might have been an initiating of some downside to come. If we break higher above the 1381 level, I retract that.
That is all for now.