July 17th, 2012

Market’s Path to 1575

“Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are…..investing is a marathon, not a sprint, and do not let the bear market turn you into a sprinter.”  all you can do is That quote is from Vitaliy N. Katsenelson’s The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere in Barry Ritholtz’s popular Big Picture blog.  And how true it is.  It’s been incredibly difficult harvesting any capital gains for so long and it feels like the recent boring market when one ignores the drama of the political and economic background grinding out day in and day out.

But all that may soon change.  The market has carved out, for reasons that continually bewilder those of the fundamental analysis persuasion, a fairly clear consolidation pattern that it is trying desperately to break out of:

For this to truly be considered a flag, volume on the breakout needs to expand and the advance has to cross above the previous high at 1420.

But if everything works out as we hope, then the outlook is extremely promising.  According to traditional charting rules-of-thumb, the consolidation pattern should be at about the midpoint of the range from the trough to the ultimate peak.  The move from an October, 2011 low at the end of the Congressional and the beginning of the EuroZone budget stalemates to March 2012 peak was approximately 26.5%.  Advancing a similar 26.5% from the June bottom of this recent consolidation would carry the market to about 1575.

Whether it’s coincidental or not, the 1575 target happens to also be about the market’s all-time high as measured by the S&P 500.  As we hear all the negative news still flooding the media (to which must be added the impact on consumer prices from the devastating impact of the heat wave on crop yields), it seems hard to believe that the market can advance to those levels.  However, all that negative sets us up for positive surprises.

Whenever I try to balance the news I hear against the market’s action I fall back to a chart I’ve frequently featured here: The Cycle of Market Emotions.  I ask myself what emotional state does it feel that most market participants are experiencing today.  Today, you can’t argue that most players continue to express feelings of fear, desperation, panic, despondency, depression and, sometimes, “hope” than they do emotions of optimism, excitement, thrill or euphoria.  These range of emotions are actually bullish because they signal that the market is closer to a bottom than a top.
The market’s ability to continue advancing above 1365 will give me the confidence I need fully commit the remainder of my cash reserves.

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