May 2nd, 2010

U-Turn Ahead?

I confess that I’ve written mostly upbeat sorts of posts recently:

  • There was the last piece about moving into the favorable phase of the lunar cycle.
  • Earlier, the statement that the moving averages current alignment isn’t indicating a bearish turn in momentum.
  • Finally, there was an analysis of the “go away in May” mantra showing that there was “62% likelihood that the market will be higher next October than the level it closes at on Friday” based on similar periods since 1939.

One dedicated reader criticized me for being continually and overly optimistic even though I did write in “Fear of Heights” on April 7,

“Our best guess can be nothing more than a range for the next consolidation level, a possible next peak somewhere between 1220 and 1310. There was congestion in this range in 2008 on the way down and odds are that there might be congestion as the market passes through the range again on the way up.”

But Friday’s market was about as discouraging for the bulls as anyone could dream up with the market falling since it peaked at 1217 two weeks ago on 4/17. So even with what may have sounded optimistic, I have also had my cautious moments. On March 21 (Is The Market’s Tilt Changing?), I discerned a change of slope in the market’s trend. But the clearest vision and the one that still seems to be holding true was November 9th’s “One View of Market’s Future” in which I wrote:

  • 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 falls 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.

We peaked at 1217 a week ago. We now have three possible economic catalysts in contagion of the European Economic crises, financial reforms and the legal attacks against Goldman Sachs and, now the economic consequences of the Gulf of Mexico oil spill (most of us could probably continue with additions to this litany).

So it’s time to set up those dominoes again (see Market Dominoes Begin to Fall of January 26) and see how many of them fall. That should tell us how much and when to sell stock and move into cash. Here’s the current picture:

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