Ruh-Roh, Again?

2011 is the year of the rabbit, but it may as well be known as the year of the range as well. With the exception of the final leg up through January and the ferocious sell off of late July, the market had been oscillating within a consistent range from February onward before cracking on July 27^th.  As exemplified by the following chart of the SPY, the rapid sell off from late July finally settled down on August 8^th where the lowest close printed followed by range with high volatility.

SPY Year to Date

 

Returning to a previous chart I've (posted), 

SP-500

the SP-500 on a weekly time frame continues within the price range boxed at the time. From the perspective of Weinstein this is clearly stage 4 with price below a declining 30 week moving average and from the perspective of Wyckoff it remains to be seen if this is redistribution before another leg of mark down. On the chart I make a note at the bottom of the range, “If range breaks... Speculative Line of Least Resistance.” For an explanation of this I turn to Edwin Lefervre's classic Reminiscences of a Stock Operator:

 

This experience has been the experience of so many traders so many times that I can give this rule: In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction. A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him.

Therefore, the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.

While the major indexes are still boxed in their range, one significant index is not, the Russell 2000.  The Russell has closed under its August 8th print on 09/22 and again on 09/28.  Having pierced this close twice and considering that indexes are a lagging indicator to begin with, this portends more down side looming on the horizon; and as the Russell also has a characteristic of being a leading index, being one of the first to break the range carries additional weight.  While it is not up to me to determine the limits of these get-nowhere prices, another mark down period is looking highly probably and preparing for such would be prudent.

Russell 2000 09/30

 In addition, however one wishes to define a bear market: a key index below a 50 or 200 MA, below a 30 week MA, down 20%+, the Russell clearly fits all of these definitions so it is also important to keep in perspective that a range in a bear market will exhibit different behavior tendencies than a range in a bull market.  Any thoughts I had that this is going to be a simple correction have been dismissed.  It's important for me to recognize this if only for the simple fact that it helps me study this market in its proper context and cater my learning towards what it is expressing upon me and not what I want it to be doing based upon what I am studying.