November 14th, 2008

Does Today Lead to the Happy Ending?

The twitter service was out of commission for most of the day but for those who did come here before around noon saw my last twit: “Model Acct: bot 50 SSO at 25.36 at 10:25am”. OK, so I missed the absolute bottom by 2 and a half hours. But there was something about today’s early action that said to me that between the Fairy Tale and Nightmare scenarios I painted last week, Fairy Tale was turning ever closer into a happy ending.

In the Fairy Tale, I outlined a strategy that, late this afternoon seems to have begun. I wrote:

I’m hoping that the test will succeed and lead to another bounce off the 825-850 low. If that works out well, there could be an opportunity for a break above the upper boundary trendline in May followed by a cross above the 180-day moving average (that “all-clear” signal I’ve written so often about here) in the 1050+/- range around May 15-June 1….

  • The test has to be successful and the October 10 low must hold
  • The bounce off the low again has to be fairly sharp (the last bounce was nearly 20% in a week!).
  • The final move down (if the market doesn’t just fly through 1000 on heavy volume) has to be on low volume and end higher than 900.

Here’s what happened today, minute by minute (click to enlarge):

The market will not go straight up to the 1000-1050 range, the remaining 10-15% of this leg. A retracement of a portion of today’s big move wouldn’t be unreasonable. But if it does happen according to plan, it shouldn’t take much longer than year-end for the real test will begin. Will we then retrace no lower than the 900 area or will the market make a third attempt at breaking the 825-850 support? I’m not going to make a prediction; I’m just going to let the market tell me when we get closer.

True confession time – I feel extremely vulnerable looking that far out purely on gut feel. The real world context feels even more shaky than it did just a couple of weeks ago. Announcements of a dour holiday shopping season, the whole auto industry on the verge of collapse, the world financial community pointing their fingers at us as the culprit that caused the worldwide financial crises and hints at a test of Obama’s ability to stand up to intimidation by our adversaries.

There isn’t much cause for confidence, optimism or putting safe money at risk. But then again, they (I’m referring to those who are already rich and got there by assuming big risks) say that this is just the time that risks are high because potential rewards will be high. That’s not to say that one jumps in and throws caution to the wind. We have a script and we’re going to take our cues from it…until the lines are change, that is.

In the meanwhile take a look at the model portfolio. The portfolio’s stocks had a terrific day and, for the first time, the portfolio is ahead of the hypothetical “buy and hold” SPY portfolio. Remember, these stocks were culled from the “Golden Cross” stocks (to be updated soon).

Also take a look at the major oils, XOM, COP and CVX. All three had more than a 10%+ day today. On October 15, I wrote (and please ignore that the lines in the sand had to be redrawn again subsequent to that post):

“take a look at what’s happening to the some of the largest cash machines, the major integrated oil firms. Are they confirming having reached the bottom or the lower boundary of their channels also going to be busted (note these charts cover 23 years!)….All three of these stocks have grown at the average rate of 10-11% per year.”

Again, I wish I’d taken my own advice because while the S&P 500 close today is virtually flat with the October 15 close, COP is also flat, XOM is up 20.9% and CVX is up 26.2%.

Finally, I have to mention this. Any of you who watch Mad Money almost nightly recently have been hearing their new mantra “buy and hold is dead”. Copy Cats! I wrote on February 22, 2006 after stopping in at the NY TradersExpo:

Walking around the booths at TradersExpo and sitting in on many of the lectures I realized that many traders and investors today view the stocks market as if it were a commodity or foreign exchange market. Traders in those markets may not understand nor ever physically touch an underlying precious metal, commodity or foreign currency; but they are interested in the underlying supply and demand and use volume and price movement to guide their decisions.

Many stock market traders, including this one, now successfully apply similar tools, principals and practices. “Buy-and-hold is dead; long live technical analysis”

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