Tuesday, January 25, 2011

Flat day...

...but a lot of action, SPX went down as low as 1281, just two points above SMA 120 then recovered all the lost ground in the last hour of trading and ended flat.

So, here is the deal. When a trend is starting we are expecting that trend to continue, that's the whole idea behind "momentum trading". The intermediate time frame I am interested in turned bullish at the beginning of December, around 1205. From that moment on it was bulls' job to prove they have enough "ammunition" to keep the uptrend intact, meaning higher highs and higher lows on daily chart, positive DMI, no EMAs crossing and market above SMA 120 on hourly chart. At this point all the pressure is on bulls, they need to prove that there is still room on the upside. They need to make a higher high on daily chart, a close above 1296, they need to keep SPX above SMA 120. There is less pressure on bears, they don't need to prove anything since the trend does not belong to them. If they manage to do some "damage" in meantime is good but is not absolutely necessary for this trend to lose its bullishness. As soon as this market is going to turn bearish (WHEN is going to turn bearish) all the pressure is going to be on bears. They need to prove that they can keep market at a safe distance from SMA 120, they need to push market lower and lower, making lower highs and lower lows. Last time the intermediate time frame turned bearish bears didn't do a good job. SMA 120 was crossed just a couple of days after the sell signal was generated, then it was challenged another 3 times in less than two weeks. Not only that but they could not push the market bellow 1175-1180 in four attempts.

When the "buy" signal was generated in December the uptrend was very clean. Price stayed at a very comfortable distance from SMA 120, EMA 25 and EMA 50 were not even challenged until December 15th. This is how a healthy uptrend or downtrend looks like. If you look at the price movement last year (see "Happy New Year" article) you will notice how clean all the uptrends and downtrends were.

Coming back to the present situation, we had a nice rally since December 1st, SMA 120 was not even once challenged until January 20. That was the first warning that the uptrend is getting tired. However, if you look at EMAs they were never in danger to cross each other. Intermediate time frame remains bullish but bulls need to prove to themselves that there are still room to move up.

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