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January 16, 2012

Bar-by-Bar Analysis – Week 2

by HigherAlpha

Week 1: January 9-13, 2012

For our second weekly analysis of 2012, we examine bar-by-bar for the following indices:

  • S&P 500 Daily chart - Due to the lack of buying demand, it’s best to sell some of the long positions that were bought from the lower prices a few weeks ago. There is no short-entry neither. Stay cautious.
  • Dow Jones Industrials Daily chart -  The DJIA showed more weakness than the S&P 500 index. However, we remain focused on the 12,250 key support area that we mentioned last week. Buying at this level is recommended if there is no sell-off with high volume (high supply).
  • 30-year Treasury Bonds (TLT) Daily chart – Recent bond selling pressure is a positive sign for a bullish S&P 500.

We conclude that there is a slow down in the market’s rally. Based on a variety of clues, we expect some kind of retrace lower before continuation of the rally. Watch for the Dow Jones Index 12,250 level as a support level for a potential long entry into the broad equity markets. If this support area fails, we will have a trend change. Otherwise, we can expect a continuation of the rally, which is our expectation. Detailed bar-by-bar analysis can be found below in the chart annotations and notes.

Note: When we say “Demand”, we refer to active buying, and when we say “Supply”, we refer to active selling. During an up-trend market, a lack of supply alone would allow the prices to trade higher without the need of Demand present. During a down-trending market, a lack of demand alone would allow the prices to trade lower without the need of Supply.

S&P 500 Index (Daily)

Bar 1: This is a narrow spread up bar. Market opened then dropped lower but stopped before the low of the previous bar was reached then buyers came in run the bar back up but failed to go higher than the previous bar as well. The bar closed near the highs. Volume was lower but it’s not low enough for no demand. At this point be cautious of long positions. Either demand comes back to run the market into new highs or demand disappears and market can drop back down.

Bar 2: This is a wide spread up bar closing off the highs. The market opened and immediately went higher breaking multiday resistance. Volume increasing showing demand is present to break into new high ground. However above 1292 supply is present to push the market to close off the highs.

Bar 3: The market opened and sold off back into previous area of resistance. This time the amount of supply is low causing resistance level to become support. Market then went back up above the opening price but price failed to make new high above the high of the previous bar and closed near the highs.

Bar 4: Market opened and sold off into the low of the previous bar and same level of support where buyer is again found. Then market pushed higher to break the high of the previous 2 bars and closing near the highs. However, notice the volume is lower than the previous 2 bars, which is telling us that demand is not as high as it has been 2 days ago.

Bar 5: Market opened immediately run lower below the low of bar 3 and 4 then run below the low of bar 2. Around the opening price of bar 1 market found support and buyers pushed the market back up to close above the lows of bar 3 and 4 but below the open. Volume is again lower than the previous 2 bars. This activity shows us there is lack of demand in the market. There is definately no long entries at this point in time. The safest bet in the market right now is to sell some long positions that was bought at much lower price but shorting the market is not recommended.

 

Down Jones Index (Daily)

The dow is giving us a much weaker picture this week. We can see that bar 2 where the S&P 500 broke into new high ground the dow barely went up higher and closed back below the high of Bar 1. The key level of support for the Dow right now is 12,250. That’s a good area to go long if we see no supply.

 

30-year Treasury Bonds (TLT, Daily)

Bar 1: Avg spread up bar with massive amount of volume bar closed off the highs. This is first sign of major supply coming into the market. The next bar closed lower confirming this supply. This is the starting point of weakness in the market and starting phase of distrubtion.

Bar 2: Widespread down bar closing near the lows after new high ground was hit. This is a major weakness bar given the weakness in the background from bar 1. Professionals has tricked the public into buying new highs while they are busy selling into that buying the end result is the market collasping back down into the lows. Volume is above average showing supply present.

Bar 3: This time market could not break the high set by bar 1 and bar 2. Notice the volume is much lower now compare to Bar 1 and 2. There is clearly no demand from the professional side of the market.

Bar 4 and 5: Again market try to break high of bar 3 and running into the level of Bar 1 and 2. This time volume is even lower. Then the very next bar volume increased and the bar closed near the lows. This action tells us there is no demand and supply are gaining control of the market.

Bar 6: This is lower high from Bar 4 and bar closed off the highs on lower volume. This is no demand bar.

Bar 7: This bar comes back to bar 6 price levels. The bar closed near the lows and Volume increased. The price spread of the bar is narrow. There is definitely more supply in this bar than demand. Bearish TLT is favorable for a bullish S&P 500.

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