Read­ers and stu­dents know that I have been dis­cussing the increase in sup­ply seen in the S&Ps (ES) for sev­eral weeks.  Last week showed fur­ther sup­ply and weak­ness com­ing into the mar­ket.  Let’s take a closer look.

On the weekly chart, we can see that the mar­ket spent two and one-half months below the 1338 level.  On the week end­ing April 29th, the mar­ket finally broke above this level, but it did so on the light­est weekly vol­ume of the year.  When a mar­ket breaks out to the upside above resis­tance, we want to see strong buy­ing come into the mar­ket.  This will be reflected in the spread of the bar and the vol­ume.  Although the last week of April closed on it’s highs, the vol­ume told us to be cau­tious of the long side.

The next week, May 6, the mar­ket fell hard after try­ing to push higher.  Buy­ers just couldn’t hold the highs.  The week closed near its lows and near the lows of the pre­vi­ous week on a sub­stan­tial increase in down­side vol­ume.  Sell­ers stepped in.  We view this as a poten­tial Top Rever­sal or UpThrust. The next week (end­ing May 13) saw churn­ing up and down on the daily chart, with the net result that the mar­ket closed on it’s lows for the week, though inside the pre­vi­ous week’s range.  Volume was sus­tained on the weekly chart, show­ing no upside progress.  Another poor close indi­cated sell­ers were more in con­trol than buy­ers, despite the inside bar. Dur­ing the last week, the mar­ket dipped down on Mon­day and Tues­day break­ing the demand line and paint­ing a low at 1316.  But it quickly ral­lied back up above the nearby sup­port at 1325.25, putting the mar­ket into a Spring position.

Although this can be frus­trat­ing (is it an UpThrust or is it a Spring!),  the best action is always to let the mar­ket tell us what it wants to do next.  The rally off the Spring looked impres­sive, but the vol­ume was light.  The next day saw a rally up to 1345, but no higher.  Vol­ume increased and the spread narrowed.  This indi­cated that sell­ers met buy­ers at the minor sup­ply line from the 1367.25 high.
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Friday’s action showed more weak­ness.  We see a sub­stan­tial increase in vol­ume and a close on the lows.  Normally, when a Spring is tested, we see light vol­ume and nar­row spread on the return to the sup­port level.  Here we see the oppo­site.  We also see a sec­ond rejec­tion of the daily demand line from the 1342.25 and 1290.25 lows.  The Spring will fail on a drive below 1316.

I am look­ing for lower prices next week.  Down­side lev­els for next week would include the obvi­ous tar­get of 1290.25.  (Below 1290 is the minor sup­port level of 1279 and then 1243.25, though that is get­ting ahead of our­selves).  The only sup­port above the 1290 level are the 1316 low and 1309.50 high, which would fill the out­stand­ing gap.  Given the over­all con­di­tion of the mar­ket, I would view these as minor sup­port lev­els, though we will have to see.

It should be good trad­ing next week.  Volatil­ity remains high.  I will be favor­ing the down­side, unless we some­how man­age to rally strongly back up above 1345.50.  I view the odds of this later sce­nario as low.