March 26th, 2012
In my weekly recap report to members yesterday, I wrote that “having a ‘game plan’, some expectation of the market’s near-term direction, helps put context to individual security trading decisions. That game plan may turn out to be precisely correct or widely off the mark. In any event, your game plan should give you more confidence in the decisions you ultimately make.”
My “game plan” foresees a “collision”, or convergence, between two significant chart patterns, or paths:
- the trendline extending through several key pivot points that occurred during the 2007-09 Financial Crisis Crash. I described that trendline on March 19 at the area of 1435-1440 because “that’s approximately the level of the higher of two alternative necklines of the 2007-2008 reversal top of the 2007-2009 Financial Crisis Crash.
- a narrowing ascending “spiked” channel boundaries of the market’s move since the end of last November. “This narrowing, trading range can’t continue indefinitely and I believe will be, in all probability, resolved with the market falling below the bottom trendline as contrasted with a highly unlikely blow-out cross above the upper boundary ….. sometime towards the end of April.”
The chart I included in the report depicting that “collision” follows:
Coincidentally, that projected “collision” coincides with what likely will be the launch of the seasonal “Sell in May and go away” mantra. Taking that course of action in 2010 and 2011 would have been the right move; doing so this year may again prove to be best decision.
Supporting that view but from another direction based on Elliott Wave counts [a technical approach which, in full disclosure, I don’t follow or believe in], Bloomberg BusinessWeek reprinted a report this morning from the technical analysts at UBS AG in an article entitled “S&P 500 Index May Begin Correction: Technical Analysis“.
““The S&P 500 (SPX) is trading in a wave 5, which suggests the market is on its way to a first important tactical top,” Michael Riesner and Marc Mueller wrote in a note yesterday. “The current rally is driven by fewer and fewer stocks and this is usually something we see at the end of rallies or bull moves….a setback could last as long as 10 days, dragging the benchmark gauge for U.S. equities to retest the 1,340 level.”
Where did they come up with 1340? A 5% decline to 1340 would bring the market to a level where it last pivoted and, thereby, create a trendline that soon will be identified as the neckline of an emerging head-and-shoulder pattern with the decline completing the formation’s head portion.
So if you feel that the market has been running away from you, if you are looking to take some money out of fixed income investments that are currently generating a nominal yield and putting it to work in equities then I would recommend that you wait. If you have some nice gains from having been adventuresome and put bought stocks last fall when everyone was scared to death by the European sovereign debt crisis then taking some profits could also be prudent.
There’s no need for predictions because the market will tell us within the next several of weeks its future direction. A move above the 1425-35 area will indicate further advances. A move below 1380 indicates that “sell-in-May” returns for a third year and purchases can be deferred to September-October.