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Resistance Vs Support


Just a quick note today to point out something interesting.

I’ve posted the graph above the past couple of days, so by now you are familiar with it – in particular the fact that it is a two hour graph and that each bar represents the price range for a two hour period.

If you look at the four final bars on the right side of the graph, that represents today’s eight trading hours.

The interesting thing I wanted you to see is that all of today’s action took place between the two resistance lines I drew on this graph, the blue and the purple. This shows you have the blue line (which was formerly resistance – possible could be again in the future) has started to act as support.

If the blue truly acts as support, then the market should be able (solely from a technical analysis perspective) to make a move above the purple resistance line, and possibly close above it. That would be a strong technical sign that the market is ready to move higher.

From a fundamental standpoint, things are a cloudier:

(1) The housing recovery numbers reported this morning are being interpreted as negative for the continuation of the recovery;

(2) Oil above $100 per barrel is the psychological level where consumers start to modify spending behavior much as if a new tax has been levied upon them;

(3) Valuations are high, whether its based upon Price to Earnings, Price to Sales, or Price to Book, all these traditional gauges of valuation are at the top end of their ranges;

(4) Consumer Confidence reading dropped below last month even though the expectation was for an increase;

(5) The various Manufacturing Surveys from the Federal Reserve Banks (NY, Philadelphia, Richmond, and Dallas) all came in weaker than anticipated; and

(6) The developments in the Ukraine are being largely ignored by the stock market, even in the face of Russian armored personnel carriers being deployed on Ukrainian soil in the area of the Crimea.

The Hundred Years War, the Crimean War and WW1 all started with similar (though not exactly the same) issues in the volatile area of the world. A standoff between Russia and Europe over Crimea would ultimately be pretty ugly for stocks given that valuations are at currently lofty levels. Most investors are not mentally prepared for something like this, so a war-induced selloff would probably be swift and ugly – like an episode of the Walking Dead.

So, it appears that we have a standoff between the technicals and the fundamentals, between support and resistance, between Russia and the West. Which will come out on top?

Last year, the fundamentals did not matter and bad news as well as good news was considered good for the stock market.

This year? So far, with the market marginally negative for the year, it doesn’t look like we are in for a repeat of 2013. However, we have ten months to go in 2014, so there a lot of time left for some catalyst to justify the current valuations and for the market to shrug off the negative fundamentals detailed above.

What happens if we look at technicals beyond support and resistance? Those say we are overvalued and should move lower in the near-term. But there will be plenty of time to look at that stuff in the next blog post.

For now, we will continue to execute the strategy I detailed for you last post as we employ our traditional risk management techniques.

Click here to watch today\'s video on YouTube