May 8th, 2008

A Game Plan for Today’s Market

The MTI (Market Timing Indicator) never lies, we just don’t always want to believe in it. Last week, the market got sooooo close to crossing the 180-day moving average (others rely on the 200-day moving average but “six of one, a half dozen of the other“) that I ignored the better judgment of the MTI and started nibbling at many of the stocks I already listed here. Only to my dismay.

The Index bumped against the 180-day and retreated:

Let’s summarize everything that’s been happening and see whether we can come up with a game plan together (sticking to it, though, is something we each have to do on our own).

  • The ultimate goal is scaling the all-time high resistance trendline set back in March, 2001 (do you believe it was 7 years ago already! Time sure flies when you’re waiting for a new bull market). That’s about 9.5% away and, given today’s economic domestic and international turmoil probably won’t be attained until next year.
  • We are focusing on nearer term objectives the first of which is breaching the 180-day moving average. I’ve been warning about a potential Suckers’ Rally since April 22 and even labeled the area we’re now in as the “Suckers’ Rally Zone” on a chart on April 30, the day of the Fed’s last .25% rate cut.
  • The Index is being ricocheting between the upper boundary of the channel of the First Quarter (touched 3 times before breaking up through) and the support resistance level of last year (supported 3 times before breaking down through).
  • The 60-day moving average is being pulled up by the current level of the Index and, if the Index is able to hold, will cross over the 90-day moving average. That’s a necessary first step for the four moving averages to invert their ranking and assume a bull market alignment.

These are all the moving parts I’ve written about since early April. But the only relevant question is what it all means and what to do now. In other words, what expectations should we have so we can absorb the disappointment and neither panic nor get carried away by all the empty hype?

The answer seems simple:

  • Don’t expect a booming market just yet.
  • Try to make money in what’s been winning so far: energy (oil&gas, coal and other alternative fuel sources), rails and transportation, steel and basic materials, food
  • Stick your little toe into some of the emerging industry groups (more on that soon).
  • Keep a big proportion (over 50%) in cash for whenever a clear signal is issued.
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