October 28th, 2010

The Road Beyond the Congestion

“If you watch for and navigate the turns, the trends will take care of themselves.”

While driving around the hilly, windy, wooded roads in our neighborhood, I imagine myself peering around bends as if I were actually able to see an on-coming car approaching that bend from the opposite direction. I know it’s physically impossible but imagining that I could see that approaching car gives me confidence that I’m prepared to evade any on-coming car that may have crossed over to my side.

At times like these, I approach the market times in the same way. The 1220 S&P level is somewhat like a bend in the road. On the other side, there could be a downturn or, hopefully, we’ll find a straight, smooth stretch.

In “Sweet Dreams“, I described what might happen next year if the “mid-term election year cycle” held true for the twentieth time since 1931. If the market performed as it did in 1994-95, we could see a comparable 30% increase next year. Here’s what that chart might look like to the end of 2011 (click on image to enlarge):

The congestion area around 1220 is like a bend in the road that I instinctively try to peer around to avoid collisions. There was a similar congestion in 2008 in the middle of the Financial Crisis Crash.

The 1220 level represents a key resistance area, the neckline of a huge, elongated ascending triangle reversal with the apex at the March 2009 low. The market spent 3 months in 2008 in that congestion area just above 1220 and it could spend approximately three months in a similar congestion area above, on top of or below 1220 as it peers around the corner deciding which way to go.

[By the way, I was also going to call this pattern a huge cup-and-handle formation with the April-now dip being the handle. I then discovered that, officially, cup-and-handles are consolidation patterns and not reversal patterns …. the trend leading up the cup-and-handle is in the same direction as the trend after. In this case, the trend leading into the pattern is down and hopefully it will be up after. Therefore, it’s officially an ascending triangle and not a cup-and-handle. You learn something new every day.]

I’m hoping we’ll find a clear road beyond but ….. there’s only one guarantee when it comes to the market and that’s there are no guarantees. If we survive this congestion, a curve around which we can’t now see, then the road ahead could be a smooth, straight and fast trip to a destination 30% ahead at around 1570, the previous all-time high made in October 2007. If the market looses steam and begins retreating (back to the 1130 neckline of the inverted head and shoulder that we’ve been enjoying the benefits of since September) then we could begin to hear renewed talk of a double head top formation.

But let’s let sleeping bears lie.

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  • Anonymous

    Guru,

    ALL the blogs expecting a correction coming soon & lighting up the holdings? what do you think?

  • Joe

    Can't bet against "all the blogs" now can I. Actually, your question is missing two critical variables: how deep a correction and how long?

    If you read this posting you'll see that I also talk about a "congestion" around 1220; we may already be in it right now.

    I don't think it will be that deep (perhaps 1125-1150) and no longer than early January. Does that mean I have to throw my game plan out the window? Don't think so. I might just want to hold off committing much more new money until I'm more confident we're through it.

  • Anonymous

    Hello Joe,,What kind of pop over the yrs does the market get after the State of The Union speech in Jan ?Anything worth trading about there ? Thanks for any info.

  • Joe

    I don't think anyone has done research on this interesting idea but my guess is that for the month, two months, quarter, etc. after the State of the Union speech over 10 yrs, 20 yrs, 30 yrs., etc. will find the market moving up 70% of the time and down 30%.

    The reason I can say this fairly emphatically is because you find this percentage in almost any statistics related to the market over a long time horizon.