October 19th, 2009

Ascending Everest: the Mid-Station Rest Camp

The market ride since March sometimes feels like a trek out of a valley in the Himalayas. Nearby peaks are clearly visible but we’re already starting to feel winded and slightly dizzy from the lower oxygen at these higher elevations.

So far, the climb has been exhilarating but nothing like the climb to the top. [Please, don’t get literal on me and ask what happens after you reach the top. I’m only using a metaphor and will need to come up with something else, for example “flying like an eagle”, after reaching the top.].

In any mountain climb, it’s necessary and appropriate to rest and regain strength at a mid-station in preparation for the final assault on the peak. Let’s look at where we’ve come from and get a fix on exactly where we are in order to gauge where we might be headed (click on image to enlarge):

Some technicians visualize sloping trendlines but I focus on the horizontal elevations marking support and resistance levels. These lines are conceptual rather than real or concrete; they indicate where a struggle between bulls and bears, buyers and sellers, demand and supply has taken place in the past and may, in all likelihood, be repeated in the future. It’s where the equilibrium of a struggle has been broken with one force taking over control from the other and reversing the previous trend of momentum.

Because that struggle takes time and extends over a range of prices, it’s more appropriate to consider “zones” rather then points. In the above chart, the peaks in 2000 and 2007 are represented by the blue dotted line where bears were victorious over bulls and began the downward momentum of the Tech Bubble and Financial Crises Crashes. The lower solid red trendline marks the bottoms where bulls were victorious, successfully turning momentum around leading to subsequent bull market moves.

Between those two are other areas, marked by circles, where equilibrium was broken and momentum reversed leading to consolidations, recoveries or corrections. These zones, marked by dotted red lines are at approximately 950, 1080 and 1150. What makes these levels important is that the reversals (support or resistance) recurred several times over the past ten years.

What makes me feel uneasy is that by entering the zone between 1080 and 1150, the market is closing in on the same mid-station as that of 2004 in the ascent from the Tech Bubble Crash. The 1150 elevation zone has seen a reversal five times since 1998 so there’s a good probability that we’ll see a reversal somewhere around that zone again sometime between now and early 2010 (for a further description of what that consolidation might look like, see “Two Market Consolidation Models: 2004 and 1933-35” and “Comparing Labor Days in 2003 and 2009“).

That rest camp is a mere 5-7% away. Could the market zoom right past that level and head to the next congestion at 1260-1270? It could but the odds are against it.

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