S&P 500 - Jan 31, 2009

charts courtesy of stockcharts.com

I really feel bad for the bulls. They had some talking heads on evening rounds of financial TV telling them that some plan was in the works to work it all out. Then they saw futures gapping up so nicely, and prices held high and mighty in the close of Wednesday. Then the whole thing gapped down on them.

Even some bears called it the beginning, or the resumption of the counter trend move higher. On one generally bearish blog, I saw charts with targets in S&P 1000 and above, drawing target areas and saying how quick money could be made ahead of the next big market drop from higher levels.

Even following the charts might trick some technicians. We had a breakout from a widely watched resistance level. But a technician worthy of his trade would bail on Thursday after the gap down that left us with an island reversal pattern. Acceptance of a loss is the hardest and the most important part of this game – and the sooner, the better.

It was not a big drop really, from 877 to 824, 50 points or so. But the psychological effect of it may be of more importance.

That is one of the reasons why I like range bound action. So much bull and bear capital gets whipsawed into losses. And by the time market is ready to make a move, there will be more skeptics than participants.

It still may happen that index gathers steam and goes up, who knows? Only that the bulls were just dealt a really tricky set of cards. It’s like they had 4 kings, bet a big chunk, and saw the opponent opening 4 aces – ouch!!

It happens.

On Friday, index tried to set a rally at the open, but seller would have none of that nonsense and it was downward action all day long

This is 15-minute chart of the index

Compare the wave structure of the drop from January 29 to the rise from January 21 and ask yourself this question: which one looks impulsive and which one corrective?

There are some positive divergences showing up, so, a bounce may be near. Please be mindful of the time frame. A 15-minute bounce may or may not lead to a 60-minute bounce, to a daily bounce, and so on. And depending on the direction of larger frames, small frame moves may or may not change the price dramatically.

This is a 60-minute chart

There seems to be a strong floor around 800-810 that supported the index for 4 days.

Breadth was negative. Volume expanded a little.

In a post on January 26, I wrote this

I would keep an eye on MACD, a cross may be very good for the bulls. ... I say this because McClellan oscillator has just been stopped from going down by an uptrend established from the October low. If they can carry higher, they might drag mid-term breadth out of mud and cause enough internal momentum for a good rally.

Let’s see where we are

We did not get the MACD cross, and breadth oscillator reversed course.

This is a perfectly executed whipsaw.

Being neutral and uncommitted, and just following the charts has so far worked. Soon this tight pattern will resolve, and if I want to take advantage, I need to start thinking about taking sides, and ponder how best I can participate without being exposed too much.

I know I will have to scale in as the next move gathers steam. The same principle of adding to one’s position that I have showed on a 1-minute chart applies to any time frame. The lag becomes bigger as time frame expands, but it is the same thing that I would do if I got a directional move.

It is that initial position that, at this point, is a bit of mystery to me. When in doubt, I remind myself that cash is also a position.

Food for thought: remember this count from the Food For thought part of the post of January 14?

Well, take a look.

Market seems to have a way of showing heaven and giving hell.

Surely the bulls got fooled in grand fashion. I wonder if there is something in store for bears as well or not?

Resistance: 850 area

Support: 810 (supported the index 4 days in a row), 800 as an obvious choice, 770 a pivot, Nov low: another obvious choice