Friday, 6 November 2009

S&P at resistance, Volume fallen on rise

Yesterday the S&P500 traded up by nearly 2%, completing a four-day up sequence from the intra-day lower low of Monday. On the New York Stock Exchange 2501 issues advanced and 541 issues declined for a ratio of over 4.6 to 1. Advancing to declining volume was better than the ratio of issues A/D at 6 to 1. Overall volume has fallen through this week as the market has risen – not a good sign. Falling volume on rising prices in the first half of October at the exchange/index level provided a good set up for the top formed in the second half of the month.

The S&P index is now in a resistance zone, and after four up-days and being a Friday, which has a tendency to be a reversal day (profit taking ahead of the weekend) expect a dull day at best today. Beyond today we are still in distribution mode – trading down on bigger volume and up on lesser volume. The 10 and 50 day moving averages should cross today (a dead cross as opposed to a golden cross). Investors can come back to the market in January and not have missed any major upside in prices – this is highly likely. That is not to say that that equity markets have to go down a lot. The liquidity cushion is still under financial assets, so markets can consolidate the huge gains from the March lows by moving sideways, hence the distribution rather than collapse to lower levels.

Tactically today is as a week ago – a good day for lightening longs, adding to shorts and overwriting call options. Beyond a day tactics should be focussed on selling into strength when the index gets into resistance levels.

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