February 18th, 2009

Market’s Double-Top Revisited

Over the past several weeks, I was feeling confident that the market was finally building a base. It had been a long time since there was even a horizontal trend but now the market appeared to be forming a symmetrical triangle and even a large percentage of stocks were repairing their charts as evidenced by their ability to cross above longer-term moving averages or forming reversal patterns themselves.

I would be lying if yesterday’s nearly 4.56% market decline didn’t undermine that confidence and that a penetration of the support trendline going back to the 2002-03 Tech Bubble Crash bottom wasn’t imminent followed by further moves into new lows that hadn’t been seen since the mid-1990’s. I even heard some “talking heads” use many of the same language as what I wrote last November in “A Double-Top Ending to the 1990’s Tech Bubble?“:

“With trepidation in using The Great Depression as a yardstick for measuring this evolving recession/depression and the 1930’s crash as a model for the current market, one can conjecture that the eventual bottom is out there somewhere towards the end of 2009 at a level that erases most of the 1990’s Bull Market (in the 400-500 area). Impossible? Well, did you ever think we’d see 800 again after hitting 1500?

Please tell me this fear of another 50% decline from here is out of the realm of possibilities. But in response as an unrepentant chartist, let me offer that the two peaks (2000 and 2007) could be viewed as a the two heads of a huge, extended double-top formation:

Three months have passed since that post and we’re back to facing the same issues and continuing to ask the same questions:

  • Have today’s prices discounted all the bad news we continue being bombarded with?
  • Do we now see more clearly that both domestic and international economic problems are more significant we thought at the end of last year?
  • Have new problems now seen that weren’t even imagined last year?

I must confess I allowed myself to become victim of a most common problem. I let my native optimism overtake discipline. I saw all all those signs I’d been writing about and decided to edge out by putting 20% of my cash to work. A big chunk is in precious metals stocks and ETFs but the remainder was put into stocks with favorable patterns in anticipation of a break out on the upside.

According to the MTI, the market’s far away from a “green light” that risk has been substantially reduced. The market’s 60-day moving average hasn’t yet crossed above the 90-day and the index itself is still below all MAs. This is still no time to put money to work so I dumped most of those positions this morning and won’t get back in until the market gives more unequivocal positive signals.

We can buy stocks because the overview looks favorable or we can see the market outlook as being favorable because we own stocks. Because I fell into believing the latter, I had to make appropriate corrections by backtracking.

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