In the last post I indicated that the markets could find support around the 14,500 level and the markets found support at 14,550. What we experienced was a sign of weakness (SOW) which was accompanied by significantly increased spread and volume to the downside and a “fall through the ice.” The markets have rallied significantly back through the ice, the spread to the upside is good and the volume is decent. We will be looking at the spread and volume as it approaches the LPSY at 15,340.
If this move is made with less spread and/or volume then a case for the bulls would be questioned.
There is another alternative for a market top that we can look, it’s called an upthrust after distribution.
An upthrust after distribution is characterized by a pronounced move upward, breaking through the highs of the trading range. You have a false signal about the direction the markets are going to take and this action allows for further distribution of stock at higher prices.
Let’s take a look at Apple Computer:
Apple, runs into supply at the Preliminary Supply point. It then sets a new high and begins to move in a trading range. The stock then upthrusts to a new high but the spread is narrow and the volume reduced. This indicates a lack of good demand and confirms that the trading range was not accumulation but distribution. The volume is hard to read on the above chart, I just wanted to give you a feel for an upthrust after distribution.
Note: A lot depends on the nature of the price and volume action taking place in the stock market. We will be looking for signs of accumulation that would invalidate the topping process and start a new markup phase…….the markets a never easy!
When we look at a trading range we are trying to determine what supply and demand are telling us. Comparing the rallies and the reactions within a trading range in terms of volume, price spread and time will help to identify the next move in the markets. The use of point-and-figure charts will also help to determine the price objective of the move outside of the trading range. The longer the time spent in the trading range the greater the potential move will be.