Where is the Stock Market Going?
Where is the Stock Market Going?
Once again it is time to take a look at the stock market from a larger perspective to see if we can figure out the near term and longer term future price direction. Forecasting a market's turning points and direction in advance is the single most important edge traders and investors can attain, if they can attain it. It is so important because market timing is how we achieve the low risk, high reward, and high probability entry point in any type of trade. Our strategy for forecasting market price direction has paid off dearly over the past couple years. In our Extended Learning Track (XLT) trading program, we accurately identified and predicted the March 2009 low a week or so before that market low was put in. This allowed us to buy into the market at the lowest risk and highest reward time.
Currently, the S&P and NASDAQ have reached larger time frame supply levels which means the strong rally from the March 2009 low is likely to end for a while and there is some room for a decline. Let's take a look...
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Figure 1
Above is a monthly chart of the S&P. Notice the area shaded yellow, this is a supply (resistance) level. This is a very small level with only two candles in it which on the surface may not seem appealing, but think again. The likely reason why there is such little trading activity is because supply and demand is very much out-of-balance at the level. This, of course, is also a monthly chart so keep that in mind. Next, notice the strong decline in price from the level again, suggesting a big supply and demand imbalance at the level. This is also a fresh supply level meaning price has not traded back to the level since the level was created. The odds of price trading up through this level in the very near future are unlikely. Could it happen? Sure, but I would be surprised.
Figure 2
Next, let's take a look at the daily chart of the NASDAQ. Both are daily charts. The chart on the left shows the supply level (yellow shaded area) and the chart on the right shows current price with that same supply level, showing the bottom line of the supply. I had to use two charts because the supply level is far back and could not be shown on one chart. Again, look at how strong price declined away from that level when it was formed. This suggests a big supply and demand imbalance. Last week was the first time price traded back up to that level and had trouble. Also, price gapped (circled area) up to the supply level. This is a strong signal that price will decline from this level before moving higher again.
The next chart below is a daily chart of the S&P. The demand levels shown on this chart help us predict where price is likely to stop falling and where and when we can expect the next decent rally to come from. The circled area represents demand, but not the strongest demand level for two reasons. First, there is too much trading activity in it to suggest a big supply and demand imbalance. Second, it is too close to the supply area above it, seen on the monthly S&P chart above. The lower demand level in the 1140 (S&P Futures) area, however, looks to be a much better demand level. This is a cleaner level with less trading activity that is lower on the supply and demand curve which is always a good thing.
Figure 3
Remember, price in any market always turns or changes direction at price levels where supply and demand are out-of-balance. The greater the imbalance, the quicker and bigger the turn in price will be. The greatest edge in trading is to be able to identify this picture on a price chart. My hope is that this piece not only shed some light on the market's next direction, but also helped you identify price levels where supply and demand are out-of-balance. Note that this article is written a week before it is published and money never sleeps; things may have changed a bit by the time this price is published, but that's not likely.
Now, if I only had a dollar for every time I wrote the words supply and demand, I would not need to trade... :)
Have a great day.
- Sam Seiden
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About Sam Seiden
Sam brings over 15 years experience of equities, forex, options and futures trading which began when he was on the floor of the Chicago Mercantile Exchange where he facilitated institutional orderflow.. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.
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