I think you could find an equal number of traders that would make a case for being bullish or bearish. We sit right in the middle of the trading range we have been in for months with prices tightening tighter and tighter (less distance from the highs and lows, staying closer to the middle).
heck … when I look at the charts, half the time I get a bullish response, and the other half … well you know. And my end of day analysis is very similar.
It doesn’t help that we have the lightest volume of the year (literally) this week … so it is easier for being to move the market to their own desires. I firmly believe we will have resolution next week when everyone comes back to work, and most likely I think we will get the indication the first market day (Jan. 3rd) with a strong up OR strong down day. I feel the big players will come back ready to set the tone for the next quarter within a few days.
We are approaching the apex (or end) of a symmetrical triangle which currently has a slightly bullish tone. A triangle forms when price over time gets closer and closer to the middle … lower highs and higher lows. When the market is not trending triangles form often. Generally once price breaks out of the triangle it moves very aggressively in the breakout direction. The reason for the aggressive breakout because price is touching new ground that it hasn’t in a long time. So you have four different types of investors acting on it. As an example … let’s assume price breaks to the upside out of a triangle …
1) shorts that were in the market will place their stops above the top of the triangle … so their exits will trigger buy orders.
2) longs that were in the market … are still in … and generally will get more aggressive as their trades go in the right direction. They may buy more, or at the very least raise their stops.
3) many traders will place buy orders slightly above the triangle so that they are not in the market risking anything until the actual breakout occurs … so these traders add to the demand at that moment.
4) a potential short investor generally will stay away from entering a short trade on a breakout, accepting temporary defeat and staying out of the market.
So, you have a dry up of supply and a whole bunch of demand … hence the lightning fast move. The opposite but equally powerful move occurs on a breakout from the bottom.
Sometimes breakouts will fail, but less often … a breakout failure usually is obvious as it is happening if there is not an aggressive move. So, if a breakout occurs and price just meanders around the breakout point, usually we will get an aggressive move in the opposite direction.
Any case, as we get closer and closer to the end of the triangle, resolution is forced upon the market. The last triangle formed between (October 27 and Nov 15) and resolved with an aggressive 8.4% decline. This triangle is much larger, which usually means more aggressiveness since more time means more people involved in the market … more fuel to the fire once the spark is lit.
My gut tells me that we will have a strong bullish quarter, but I don’t listen to my gut … and in fact fight hard to quiet it … but when the facts are not clear it is hard for my gut to not take over. I am actually playing the market on both sides right now but with small position sizing. I am roughly 75% long and 25% short … which shows my slight bias.
Anyway, kind of a sleepy week for the market, waiting for the big boys to come back from vacation … I look forward to the resolution.