January 14th, 2011

Approaching the First Objective

It’s getting to feel more and more like a real, old-fashioned bull market. There seem to be three varieties of stocks these days:

  • Category I stocks started running last Labor Day and have now advanced far ahead including semiconductors, software, internet and precious and rare metals.
  • Category II stocks are just now breaking above key resistance levels and are just now joining the bull run including money center banks, industrial equipment, construction and engineering, large biotech, pharma and healthcare, telecommunications and fiber optics.
  • Category III stocks are hopelessly stuck in a downdraft; these include many savings and loans, small regional banks.

Last weekend, I selected a Watchlist of 275 stocks with clearly identifiable breakout levels and 38 of them have since crossed above those trigger level and now confirmed buy candidates (subscribers received the list at the beginning of the week). Having said that though, a word of caution at this point is warranted.

Let me take you back to 2009 and the market had just broken above the neckline of what is now a well-recognized inverted head-and-should bottom to the Financial Crisis Crash. When the S&P 500 was at 1010.48, I wrote in a piece entitled “Difference Between Correction/Consolidation and Reversal“:

“I’ve mentioned here before the rule-of-thumb for measuring targets out of head-and-shoulder patterns: at a minimum, the neckline represents the approximate mid-point of the total move. If the distance from tip of the inverted head to the neckline represented a 43% move (952 neckline/666 tip), then the minimum target could be around 1350-1375. It won’t be a straight line since there will probably be major, lengthy consolidations along the way.”

In a piece entitled “Importance of S&P 1150 Can’t be Overstated” of January 19,2010 when the S&P 500 was 1150.23, I wrote:

“Peering out at that major hurdle [1150] has stymied me in my trading and search for great stocks for the next phase of the recovery to 1325-1350. But our form of charting isn’t intended to predict the market, it’s aimed at being prepared for market turns and knowing what to do when they occur. In the meanwhile we ride the wave, up or down.”

That was reconfirmed in November in “Was November Like the April Peak?” when I wrote:

“I haven’t seen anything yet to cause me to begin selling what I believe are excellent positions nor to reverse call for a move to 1320 by May and possibly 1500 by year-end next year.”

Here we are with the S&P 500 hovering today at 1292, just 2.5% shy of the price objective and more stocks continue to breaking above their breakout levels. Are these conflicting signs? Should we buy these breakouts or sell what we already own in anticipation of the market hitting what we’ve long believed to be an interim target? (click on image to enlarge)

First, we don’t really know where the market will actually take a rest (1325 or 1375 or ?) and when it does, we have no way of knowing how far down the correction will take the market. What we are fairly confident about is that the correction will be just that, a respite from this rapid and steep climb (22.7% since August 31).

My guess right now is that the correction from 1325 will be about 6-7% back down to no further than 1245-1250 and that it will be fairly sharp and quick. For individual stocks this will represent a more significant correction for Category I stocks list above but nothing more than a buyers’ remorse corrections for the Category II stocks.

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  • Anonymous

    looks like hot money flow to XLE now? what is your take on GDX? buy or sell take a beating lately.

  • Joe

    Like XLE but sold off all my precious metals ….. there are too many better opportunities today (i.e., bigger percentage moves with less risk) in semi's, financials and all things tech related.