Readers and students know that I have been discussing the increase in supply seen in the S&Ps (ES) for several weeks. Last week showed further supply and weakness coming into the market. Let’s take a closer look.
On the weekly chart, we can see that the market spent two and one-half months below the 1338 level. On the week ending April 29th, the market finally broke above this level, but it did so on the lightest weekly volume of the year. When a market breaks out to the upside above resistance, we want to see strong buying come into the market. This will be reflected in the spread of the bar and the volume. Although the last week of April closed on it’s highs, the volume told us to be cautious of the long side.
The next week, May 6, the market fell hard after trying to push higher. Buyers just couldn’t hold the highs. The week closed near its lows and near the lows of the previous week on a substantial increase in downside volume. Sellers stepped in. We view this as a potential Top Reversal or UpThrust.
The next week (ending May 13) saw churning up and down on the daily chart, with the net result that the market closed on it’s lows for the week, though inside the previous week’s range. Volume was sustained on the weekly chart, showing no upside progress. Another poor close indicated sellers were more in control than buyers, despite the inside bar.
During the last week, the market dipped down on Monday and Tuesday breaking the demand line and painting a low at 1316. But it quickly rallied back up above the nearby support at 1325.25, putting the market into a Spring position.
Although this can be frustrating (is it an UpThrust or is it a Spring!), the best action is always to let the market tell us what it wants to do next. The rally off the Spring looked impressive, but the volume was light. The next day saw a rally up to 1345, but no higher. Volume increased and the spread narrowed. This indicated that sellers met buyers at the minor supply line from the 1367.25 high.
Friday’s action showed more weakness. We see a substantial increase in volume and a close on the lows. Normally, when a Spring is tested, we see light volume and narrow spread on the return to the support level. Here we see the opposite. We also see a second rejection of the daily demand line from the 1342.25 and 1290.25 lows. The Spring will fail on a drive below 1316.
I am looking for lower prices next week. Downside levels for next week would include the obvious target of 1290.25. (Below 1290 is the minor support level of 1279 and then 1243.25, though that is getting ahead of ourselves). The only support above the 1290 level are the 1316 low and 1309.50 high, which would fill the outstanding gap. Given the overall condition of the market, I would view these as minor support levels, though we will have to see.
It should be good trading next week. Volatility remains high. I will be favoring the downside, unless we somehow manage to rally strongly back up above 1345.50. I view the odds of this later scenario as low.
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