In our February Share Market View we stated
“In the past 4 weeks the markets have been demonstrating an extreme of negative sentiment which we now believe to be coming to an end. The obvious conclusion to an extreme sentiment event is a sharp reversal in price and it is now we believe that this is most probable. (Stage 1 accumulation) The Market (Basis $SPX) has formed a solid base above the November swing low. A break up and close above 1104.73 will once again confirm the resumption of the short term upward trend. (Stage 2 expansion) This needs to be watched closely because it may evolve into a resumption of the larger bull market move.”
It’s now the 19th of April and the market is approaching the targets outlined in February. The market is now over-extended and the probability of further dramatic upward moves are limited. Significant resistance exists at 1216 (Basis $SPX) with the market approaching the Fibonacci 1.618 extension of the counter-trend range A-B. In addition the Fibonacci 0.618 division of the 07 high to the 09 low is slightly above the current market price at 1229 (potential area for Stage 3 distribution).
In February we talked about the measurement of extremes of sentiment and its importance in the timing of derivatives trades. We are once again at an extreme of sentiment and at this stage it is difficult on a daily chart to find low risk high reward trades. At the end of any extended move the market needs to distribute shares to those who are arriving late to this rally. This takes time and can be observed as sideways choppy price action sometimes taking over a week before the market falls into its counter trend (Stage 4 counter trend). As the market moves into its distribution phase we anticipate the formation of a counter trend, the completion of which will provide us the next opportunity to go long. (Back to Stage 1)
The prime directive given to all Options21 Mentoring Graduates trading daily charts is to identify the formation of stage one just as we did back in early February, giving us the best opportunity to take timely advantage of the impulsive moves that we have just witnessed over the past 10 weeks. Price action observed watching SPX was mirrored to an equal and sometime much greater extent in many of its component stocks. I addition, for those of you just trading ASX stocks a near identical picture was observed with ASX 200 and many of its stocks.
A complete update of the macro view of the market is given in detail on the first Wednesday of every month in our Live Market Briefings.
Happy Trading,
Paul Wise.