July 23rd, 2010
There wasn’t much to right about this week. I could have expounded about the “trading range” everyone else was talking and writing about but then you wouldn’t have learned anything new or different. My difficulty amidst all the conversation was that I wasn’t quite sure which trading range they were referring to since you actually could point to many depending on the time horizon you were looking at.
You can think of them as one of those Russian matryoshkas dolls. You may not have known what they were called but nearly everyone has one at some time. Trading ranges aren’t complicated; they’re just another way of talking about horizontal support and resistance trendlines/areas.
Using the S&P Index as an example, I can envision 4 nested trading ranges depending on your time horizon (click on image to enlarge):
The smallest and innermost nested trading range is the one I mentioned last week. Based on the news today about the European bank test results (which everyone seems to now discount since they turned to be anti-climatic), it appears that the Index is again trying to break out above the upper boundary of that trading range. Success may come next week.
But that won’t mean that the market starts moving straight up because there will be another larger trading range that it will have to break above. And, after that, another and then another. But you have to begin somewhere and this is as good a point as any.
But here’s why everyone is still feeling queasy. Notice that the bottom of each of the ranges overlap each other. If the move through the top fails, there’s still the risk of falling through the bottom and if that happens, there isn’t any support until 950.
I feel that the clock is ticking towards the end of summer without the move down to my correction target level of 925-950. When conditions change, you have to change your strategy. I’m taking off the hedges I had and lost money on but wrote off as the price of insurance against a serious decline and started picking up a few strong, early movers.
Like the rest of you, I’m hoping that all the money that’s been parked in near 0% money market accounts will be thrown at the market and we’ll see a very strong mid-term election year rally to year-end as earlier predicted back in January.