November 6th, 2008

Fairy Tale with a Happy Ending.

On November 1, I wrote:

“we may be nearing the end of the first step of the base building process (we are up 15% from the intra-day low of 839.80 on October 10; we could move up another 5% to 1020) followed by a reasonable and anticipated retest of that low. So you need to be agile if taking a short-term trading position in any of these stocks.” [note: The intra-day high on 11/4 was 1005.75; pretty close, I’d say!]

That retracement has begun, so the question is now whether the bottom will hold or be broken? Allow me to fantasize (or “hope”, a word very much in fashion today) on the direction of the market over the next several months:

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.

You ask, “How do you know that?”My answer, “I don’t know for sure, it’s only a gut guess.” It’s merely my best-case scenario, a target, a game plan to follow. The next six months will bring all sorts of real world events that today we can’t even imagine in the economic, international, tax, political spheres. But as they occur, analysts will explain them, investors’ emotional reactions will be reflected in the prices of equity transactions and the talking heads will link them in their Monday morning quarterbacking.

This hypothetical script entails many “if’s”, each of which has to materialize:

  • 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.
  • The final move up has to be on high volume and clear 1000 with ease.
  • The 180-day moving average will not be an obstacle and the Index itself will cross above it with resounding conviction. That would be the signal for me that it’s safe to jump in.

Clearly, this is a fairy tale with a happy ending. What’s it based on? Nothing more than optimism and hope after 13 months of anxiety and pain (mostly for those who hadn’t moved to the sidelines). If it all comes to pass, it merely means 6 more months of waiting, of frustration, of waning patience followed on the other side by the reward of opportunities galore.

And if I’m wrong? I very well could be so that’s why I’m still in “capital preservation” mode and keeping my powder dry.

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