February 23rd, 2011
The chart skeptics are having their day. They’re crowing that the charts didn’t predict the past two day’s declines. How do I square the bullish of the past couple of blogs (The 12-mos. Oscillator Indicates There’s Room to Run and Conquer Your Fears) with yesterday’s 2.05% decline and what seems to be a continuation today?
My response is that charts don’t predict. A charts is more like a thermometer that continuously measures the levels of investor sentiment. Chart reading is the exercise of trying to get a sense of future trend of investor sentiment from investors’ prior, be it long-term or short-, behavior.
In that regard, what often gets lost in all the shouting in the business media is not necessarily the geopolitical events and whether or not investors had anticipated these events but, more importantly, how investors are reacting to those events. As we all know, the market has been in an extended bull run brought on by better corporate sales and profits, efforts now being made to bring the governmental budgets at all levels back into balance and improvement in the US economy relative to other worldwide economies. “It’s not the news that’s important but the market’s reaction to the news.”
In that regard I’d say that the reaction, so far, has been relatively muted. One could say that the market was primed for a correction around these levels already. Yes, a correction has been anticipated by many for some time around the 1320-1350 level (a month ago, in Pivot Points and Sell-Fulfilling Prophesies, I wrote that “the market is edging ever closer to a zone (1300-1350) that has seen six pivots since 1999). Did the market technicals predict the Mid-East turmoil would happen now, in the spring when the market hit 1344 or is the news from the Middle East just the excuse investors need, the spark, to begin the long awaited correction/consolidation? I believe it’s the latter, so far.
If you look at the chart below, you see nothing yet indicates that the market’s primary trend has reversed (click on image to enlarge):
The Index is exactly in the middle of the upward channel. It is still above the 50-dma (in red) and all the moving averages are properly aligned and turned upwards. Supporting the price movement is the OBV indicator in red at the bottom which continues to rise indicating that there isn’t as much volume on down moves than there are on those moving up.
The correction is financially painful if you’re fully invested. So the obvious question is “How much further in this correction?” I remind you (see February in the History Books) that February is historically the worst month of the year with an average -0.31% decline (or +0.06% if you exclude the February’s of 2009, 2001 and 1982 which were in the middle of bear markets). Will the correction be as severe as the the one last April-September when the market corrected over 15% from top to bottom? Or will the correction be of the more mild variety somewhere of the 6-8% variety?
No one can predict but I’m not ready to take drastic action and embracing what the media now calls the “risk-off” trade by dumping stocks, moving substantial cash to the sidelines and buying bearish Index ETFs.