A New Market Climate

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  • on January 24th, 2011

“Price advertises opportunity, time regulates all opportunities, and volume measures the success or failure of all opportunities” James Dalton

In the rush to label the market, it’s easy to forget about the role of time in market structure.  The way I see it, we have 3 outcomes to consider:

1) Great market- will regain its footing in 3-6 days and move to new highs with broad leadership

2) Good market- will fail to take back the highs right away, requiring 3-6 weeks of consolidation before moving higher again

3) Bad market- will fail to take the highs, and begin seeing breakdowns rather than breakouts in the 3-6 week basing period

We’re now in the window for #1, it’s do or die time to keep the recent trend going.  Early evidence is not good, as evidenced by “sell the news” reports and major weakness in leading mid and small caps.  The alternative scenario would be regaining the recent index highs but failing to see breadth confirm, a nasty setup of the “from false moves come fast moves” variety.

Absent a swift trip to the highs, we face a few weeks of index chop.  This makes it a perfect environment for index scalpers and fresh news momentum.  Earnings reports will be out by the dozens, and those willing to shorten their time frame will see plenty of opportunity to act.  They key is to wait and fade the multi-day index fringes, when despair or giddiness makes a temporary appearance.  Unlike recent months, levels should mean more than trends, at least in the daily timeframe.

The recent change doesn’t have to mean anything more than that…it’s simply time for mean reversion dynamics to take control over trending ones for a little while.  For a little perspective, open up a book that covers the psychology of price structure; my favorites are from Toby Crabel and Brian Shannon and James Dalton.  As opposed to recent months, the “when” may drive the action rather than the “which way.”

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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