July 20th, 2009

The Campaign for Your Economic Mind

There’s a campaign going on for your economic mind. The two sides vying for your vote are:

  1. the bears who want you to think the economic troubles are far from over and that whatever relief we’re seeing in the market over the past couple of weeks is only a temporary reprieve before another round of declines of Crash proportions and
  2. the bulls who want you to think that the economy is getting better (at least, it’s not still getting worse) and that the market hit bottom last March and is the process of anticipating an economic recovery, something it’s done in the past.

Don’t know about you but I’m sitting on pins and needles with anticipation and anxiety. It’s hard waiting to see how it’ll be resolved rather than piling on myself. But, as a chartist, I can’t tell which economic point of view will turn out a year or two from now to have been right. What I can tell you is that, for the time being, the bulls seem to be winning the most votes as measured by the flow of money that’s beginning to be hurled at the market. So, until the market indicates otherwise, this the picture we’re going to follow. Here are the facts:

  • The S&P500 index has crossed above it’s 200-day moving average and is now only 6.2% under the 300-day moving average at about 1010.
  • The 100-day moving average is above to cross above the 200-day which, itself is starting to turn upwards.
  • The anaemic volume trend is showing signs of picking up and OBV is beginning to trend up.
  • Finally, I think it’s been resolved that an inverted head-and-shoulder long-term reversal pattern is in place:

I’ve inserted two more notations to the above chart: two solid red lines coming from far off the left of the chart: the top and bottom of the 2002-03 double bottom. Coincidentally, the range of our inverted head-and-shoulder falls nearly precisely within the boundary of that last crash bottom. If you need further proof, here’s a long-term chart with those two lines:

[Aside: As my kids will attest, I continually hit them with a favorite sayings: “There are no accidents or coincides, only mysteries.” Do stocks and markets follow “random walks”? Don’t think so. Look carefully, you’ll see them mysteriously following regular and predictable paths.]

Taking an elevator ride up is going to have flashbacks to the quick ride we took down and the ride down to and up from the 2002-03 double-bottom. The floors we stopped then could, in all likelihood, also be stops we make on the much slower ride back up this time.

In 2003, the market had a “traders’ remorse” pullback to test the support of the double-bottom neckline at 1010; there could be a similar test after crossing above the neckline of the inverted head+shoulders bottom this fall/winter or early next year. Coincidentally [here’s that word again.], the beginning of that pullback lines up nicely with the upcoming effort to cross above the 300-day moving average.

After having successfully tested the current neckline and breaking above the 300-day moving average, whenever that happens (probably in 2010), there should be a clear run to the 1060-1160 range for a consolidation, the stops made on the way down in 2001-02 and the way up in 2004. We were on an express elevator as the Lehman and other financial calamities caused the market to skip the stop on the way down last year. There will be a consolidation pause, whenever it comes, and there’s a good chance it will be at around that level.

Interestingly, 1050-1060, the bottom of this trading range, is the next target both Goldman Sachs and Credit Suisse have set for the S&P 500; JPMorgan wound up in the middle of the range as reported by Bloomberg.

No one can predict the future and I certainly can’t. All I can do is setting out a possible route that the market might follow. Having similarly done so starting in January 2008 helped as we began looking for the bottom. Doing so again as we look at a long, slow crawl out of the hole and having a feel for where the rest stops might be will also be worthwhile. If we’re wrong, we’ll make mid-course corrections …. but it’s the start of a plan. More about the plan specifics to follow.

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  • The Average Jay

    Nice post.

  • Anonymous

    "After having successfully tested the current neckline and breaking above the 300-day moving average, whenever that happens (probably in 2010), there should be a clear run to the 1060-1160 range for a consolidation"

    The SPX is @980 today, looks like going to hit 1005 before it stops. Is that the 300 MA you mentioned?


  • Guru

    Yes, the 300MA is at 1005. Will it cross above it? Don't know but the market's showing terrific strength and resilience. I do expect it to take a breather before crossing above the 300MA.

    The odds are the Market will evolve into a "traders'-remorse" type of correction where the Index trends down following the 300MA (the same way it followed the 200MA in June). This could take until the Index approaches and tests the neckline. Then the full inverted H+S will be completed and the really big, new bull move begins.

    But I somewhat regret my caution. It has cost me some nice profits since I'm still 40% cash yet the MTI gave an "all-in" signal when the Index crossed the 200MA.

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