November 10th, 2009
I first started writing about the critical area between 1150-1200 on August 7 (wow, doesn’t seem like 3 months ago), the day the Index broke through 1000 for the first time since the March 9 bottom and closed at 1010.48, or 7.6% below today’s close. In “Difference Between Correction/Consolidation and Reversal” I wrote,
“The recovery from the Tech Bubble Crash saw a major correction that lasted most of 2004 between 1050-1150; my interim target for the first one …… is the 1150-1200 area. What will this correction look like? It could be a wedge, a pennant, a channel or merely a return to a trendline or moving average … but it won’t be a head-and-shoulders.”
Many readers then were skeptical and wondered whether the market would be able to cross above the 300-DMA or to stay above 1000. But the market labored ahead and three successive surges (the current surge since November 1 will the fourth) each ended at successive new highs.
A couple of days ago, I outlined a “game plan” which appears so far to be working and close to hitting the goal of 1125 (I beg some lea way to extend the target range to 1150). As the market approaches the target, it’s time to start speculating about what might come after. To repeat, this is mere speculation and guesswork as no one can predict the future but we have to some view so as to develop an action plan. If the view turns out to be wrong (and we’ll know when that is), we modify the action plan:
- The market begins to stall out in December as:
- the door for the sidelines-money slams shut for the year
- tax selling begins to capture losses and record gains in anticipation of possible higher 2010 tax income rates
- The 1150-1200 is a critical area for past pivot points where the market turned in 1998, 2001, 2002, 2004, 2005, 2006 and 2008. These pivots occurred both when the market was trending up and down.
- The turn is usually caused by an economic catalyst and one that could fit the bill perfectly would be:
- The $US Dollar firming and possibly reversing its descent.
- The “Soft Dollar Trade” (buying foreign currencies, gold and commodities), considered by many as “over-crowded”, begins to unwind and the market begins to decline.
- A logical target for the bottom of this correction is the neckline of the market’s inverted head-and-shoulders bottom, or approximately 950 in the S&P 500, a 17% decline from the high.
- The decline fall within the definition of a correction falling short of the 20% required to considered a “Bear Market”.
- The Index will find support on the 200-DMA, the crossing of which is a key indicator identifying Bull and Bear Markets
- The 200-DMA will have crossed the 300-DMA by then
- The 300-DMA will have turned up, the final hurdle before the book on the Crash can be finally closed.
For those who are habitual chartists and think in terms of graphs rather than words, here’s a depiction of what the above scenario might ultimately look like (click on image to enlarge):Many out there will scoff and say this is pure fiction, nothing more than reading a Ouija board. But is it any more fictional than some of the stories that are spun by the “talking heads”. They represent prestigious firms with large research departments but I write this blog. We’ll follow the future unfolding and learn who’s projection, given when, winds up being closer in the end.
The corrrection or consolidation could be short lived as the true top of this bull market could be nearer 1350 with the neckline at 950 being half-way between the bottom at 660 and the top on a percentage basis but a potential 17% correction demands an action plan. Help us all out. What will the market correction look like and what actions will you be taking when the arrives?
Note: I refer the scoffers out there who brush off this exercise you to “Fairy Tale with a Happy Ending“, something I wrote on November 6, 2008. I inserted a chart in that article similar to the one above. That chart turned out to be uncannily similar to the market’s actual ultimate course with the major difference being that it took longer to get here than I had projected. So be careful in rejecting this exercise too quickly.