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Finally, the upper band of this summer's trading range gave way today and the big standoff between the shorts and the longs is resolved with the shorts scrambling to cover their short positions once again.
In the upper chart cluster row 1, the S&P breaking out of its blue channel earned the #3 buy signal line. In the lower chart cluster, row 1 chart 1, today's volume just barely reached its average level which is really disappointing considering how big this breakout is and that a good amount of volume was added by the shorts covering. In row 2 chart 3, we see that in the last 30min the S&P barely got up into the steeply inclined red channel from earlier this summer. Row 3 chart 3, we see that the advance/decline is in the sell area now but that doesn't necessarily mean we will have much of a pullback.
Technically today's breakout is the beginning of the execution of an inversed head and shoulders pattern as can be seen in the lower cluster, row 1 chart 4. The first shoulder is the wave down from 5/20 to 6/18, the head goes from 6/21 to 8/9, and the right shoulder from 8/10 to this past Friday. The vertical measure of this inversed head and shoulders pattern goes from S&P 1015 to S&P 1125. This is a 110 point measure, if you add 110 points to the 1125 breakout level you come up with S&P 1235 as a potential target. Under normal circumstances this would be a really nice secure position trade for the fall but be aware that the rally off of the 1040 floor of the summer range and today's breakout from the upper band are meticulously crafted and brutally forced rallies with heavy political underpinnings behind it. Even though this inversed head & shoulders measures for a good run up thru the fall, the reality is it will only go as far as the powers that be continue to sponsor it. Granted I am expecting them to really push this thing to help undo the bad sentiment against Wall Street and Congressional imcumbents. This rally could end tomorrow or go another 3 months. In the current market, the path of least resistance is down but the short squeeze is a powerful force and that is what they are using to make the market go higher.
Over the past few months it has been shown that 60% of the avg daily volume on the exchanges is ultra high speed automated trading where computers make literally thousands of trades every second. The abnormally low volume that we see on the chart indicator would be much less if you took out the 60% attributed to the new phenomenon of ultra high speed flash trading by computers. If you took out the volume attributed to the shorts being forced to buy to cover their short positions, there is just not a whole lot of regular investor volume to be counted. The average investor is a small participant in these rallies.
Alan
