July 9th, 2009

The Pause the Refreshes , a/k/a Traders’ Remorse

The bears continue to try scaring you into thinking that we’ve seen the best we’re going to see this year and it’s going to be all down hill from here, back to the low 800’s or even 700’s (the bear market bottom) on the S&P.

What these perennial pessimists fail to understand is that all markets, whether trending higher or lower, periodically need to pause, catch their breath, marshal their strength before continuing in the direction they were determined to head in the first place.

O.K., the S&P 500 Index has retreated nearly 7% from the 946 peak on June 12 but this is exactly what we were all calling for since early May, the 6th to be exact. Actually, we reiterated the view on June 23 by specifying a decline to 800-810 by Labor Day. So the past couple of weeks has been uncomfortable and cost some money, but so far it’s just about as expected.

As I see it, the market’s correction so far is too tame to signal the end of the world – again. In fact, the Index along with many stocks are showing typical signs of fatigue, not collapse. They are either hugging a resistance trendline, bouncing up against a longer-term moving averages or demonstrating a typical case of traders’ remorse by giving up the breakout move and returning to resistance (nee support) trendlines. Here are several examples:

  • XLF (Financial Sector ETF) – hugging the 200-DMA as it forms the right shoulder of an inverted H&S pattern, gathering strength to break above the neckline:
  • NS (Nustar Energy) – after forming a inverted head & shoulder bottom and successfully crossing over the neckline, stock is now retreating in typical traders’ remorse fashion back to neckline to test its support.
  • VSEA (Varian Semiconductor Equip) – After successfully crossing above neckline of double bottom, stock is hugging the bottom of 300-day MA in the form of a symmetrical triangle.

These stocks are only examples and I could have selected many others; as I peruse hundreds of stock charts every day, a large percentage of them look similar. Rather than being dismayed, I’m excited that the long-awaited correction has arrived. As the final hurdle to a full-fledged bull market, the 300-day moving average, comes within striking distance, some missed opportunities will be brought back into line. Hopefully, sometime around Labor Day, the market will finally issue an all-clear, all-in signal.

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