April 6th, 2009

The stocks are in the gates; the race is about to begin

When I scan my charts these days, I almost feel like I’m watching horses at a track waiting for the starting gates to swing open before breaking away. We’ve all seen the horses rearing, bucking and reversing away from starting gates in reaction to the noise, confinement, confusion and anticipation. While they’re in the gates, you want to pick those horses with the best chance of winning.

There’s little question, in my mind, that the Market is building a bottom, the end of the Accumulation and beginning of the Mark-up Phases in the Market’s life cycle. So also at this crucial period, before stocks start running ahead, you’ll want to identify stocks that will jump into the lead when the market’s starting gate swings open.

I must confess I’ve never quite looked at stocks in the context of Market Life Cycle and am, therefore, amazed at large number of stocks and industries with similar chart patterns. The common denominator is the fact that they have or soon will complete near perfect reversal patterns (double bottoms, horizontal channels, ascending triangles). They say that a picture (or a stock chart) is worth a thousand words … but I’ll give words a try anyway.

  • A. Basically, these patterns have the following generalized characteristics (which, by the way, mimic the Market as represented by the S&P 500):
    • Their prices have made 4 waves: a decline to the November low, a rise to a peak in January, a decline to a March low and, finally, the current recovery.
    • The January and current recovery form the pivot points of the upper resistance trendline while the November and January lows form the pivot points for the lower support trendline.
    • Either or both of these trendlines (pivot points) could be horizontal, upward- or downward-sloping.
    • There might be congestion in October, prior to the descent to the November low.

    B. If you recall earlier discussions concerning 8 hurdles the Market would have to cross to confirm an “all-clear” signal, stocks must also cross similar hurdles.

    • Some prices have crossed the upper resistance trendlines of the pattern while others are approaching the resistance trendline.
    • Because each has followed different paths to these reversal formations (declined at different rates) and the reversal formations look somewhat different, they have different alignments of their price and moving averages. The most bullish alignment is if the price is above all moving averages, with the MA’s arrayed with the fastest (60-day) highest and the slowest (300-day) the lowest. Some have crossed above their 60-, 90- and even 180-day moving averages.

I earlier offered a spreadsheet of such stocks and suggested that you select the one’s you liked the best and add them to your watchlists; since then I’ve found many more. This past weekend, for example, I uncovered four distinct categories of what I consider stocks that have high potential when this market finally confirms the bottom. The complete list encompasses over a hundred stocks so I’ll only include the best examples:

To see exactly what I’m describing, click on the symbols below:

To repeat myself from earlier posts, stock charts don’t predict anything. And “talking heads” aren’t privy to any inside information when they say that “the market looks like it’s making a bottom”. Everyone is looking at the same data and the same charts which only indicate that this sort of price action (and there are literally hundreds of similar ones today – look here later for more spreadsheet lists of these stocks) has in the past indicated a pattern of accumulation which, in turn, lead to upward momentum.

Will it happen again (I think it will as these stocks and others crosses above their 180-day moving averages). There are sound fundamental explanations of why each of these categories offer potential leaders but I’d rather leave that to others. I’ll stick to these great charts.

Subscribe below or click here to learn more about help for navigating turbulent markets.