Trend #1, A Local, Support and Resistance and the True Nature of the Market

 I'm going to discuss briefly the Technical Analysis community's definition of support and resistance and my definition which I believe is shared by others as well as a few other random thoughts.

 Earlier today we heard from a former NYSE floor trader (a "Local") that there were buy stops in an area and then he said he had a typo and gave another area, this is another subject as the areas he gave make no sense, but I did notice his use of Technical-like views of support and resistance.

He said there were "buy stops" in the $1462.50-$1468 area. Many traders will tell you exactly where resistance is, where the pivots are, "R2" or "S1" exactly. I don't really care at all what these numbers are, I care that I know where retail will be moved to action and where Wall Street will look to move the market in order to achieve that end, so when I posted this local's depth of the book I didn't even think to check out the areas he mentioned until after the market closed.

When I checked them out I saw that those levels could not be "buy stop" areas that are packed with orders because a buy stop is above the current price, it's like buying a breakout or buying above a significant technical area, not below so maybe we'll get some clarification on that.

 Here's a chart of that area, you will probably recognize it as an important area for us recently.

Trend #1 which we forecasted over a week in advance as being a strong move to the upside, so strong in fact that whatever we might think to be reasonable, it would likely far surpass that area and the Russell 2000 made an all time new high so we were right. The other thing was that this trend #1 would be much shorter in duration and likely intensity compared to trend #2 which is a move down.  Trend #1 started on 12/31/12 and has run over 5% in the SPX.

Now note the area this local mentioned today, the top of the second day of trend #1 and the former intraday high of the range which may be familiar as it is also January 4th.

Now you may recall me laying out all of the things I wanted to see to time a reversal call, they included the SPX and NDX futures going negative on the 5 and 15 min charts which happened, Leading Indicators to go negative-which is happening and very specifically, a move above the 1/4 highs as "I don't believe we will see any 3C movement until we cross above that level".

On Jan. 10th of last week we crossed above that level, in essence we crossed above the range highs which would trigger some demand from retail and allow institutional money (consider them "Big money") the demand they need to sell and sell short without knocking the market down. As soon as we crossed that level we started getting 3C negative divergences in the short timeframes as the long timeframes were already very negative and hey have grown worse since.

I called out a specific area because I know that is exactly what technical traders are looking for, I also know Wall Street will take price to that level because they need the demand of retail traders (almost all of which are technical) so they can move in or out of positions. In the end it is the retail trader who bought above that level who gets left holding the bag.

However as far as "TRUE" support ad resistance go, they have very little to do with exact numbers like that, they are psychologically created levels and mass psychology is what turns them in to "areas" rather than levels to the exact penny.

Put yourself in this situation...

You have a trading account that was hit hard in 2007-2008, you maybe took some money out of your HELOC before they cut it off and you're trying to make this money back to send your kids to college. Since 2009 the F_E_D has been very accommodative and it' been pretty easy to make money being long. Rumors are the F_E_D is going to ease and do more QE, you see a higher high in price (first white arrow) and then a higher low and you bull that pullback (second white arrow from the left), then price makes another higher high and pulls back for another higher low which you go all in with your entire account, your HELOC money, you're swinging for the fences trying to make those losses back.

Then, the market fails to make a higher high and it moves down more than 17%, the media is talking about the 20% hogwash they always do and you are margined and maxed to the teeth. Your wife or husband is mad at you for risking and losing all this money AGAIN! It looks like you'll never have the money to send your kids to college, but then something happens and price moves up toward the area in which you bought and then starts to rollover, all you can think about is another bear market starting so you sell at a slight loss rather than the nearly 20% loss you had only a few days earlier.

This is the real emotional situation, when magnified by the masses becomes "Mass psychology" and this is what creates support and resistance zones or areas. If you think you're going to lose your money, the last thing you care about is trying to get out at resistance of $1266.88, you just want a chance to get out without the huge loss. That what creates support and resistance and why they are areas and not exact numbers. I won't deny that many traders place orders and stops right at exact support and resistance and it's really easy for the market to pick those off, but in a non-manipulated, real world situation, the truth of the matter is the market is one big emotional mess.

Some would say  "Supply and Demand" move the market, I'd say it's really emotions, specifically Fear and Greed and if you wonder which one is stronger, I give you this last chart to ponder.

A nice healthy bull market doubles the SPX in 5 years to the month. A bear market erases all of those gains and then some in 15 months with most of the damage occurring in 8 months.