June 22nd, 2012

An important, emerging new positive chart pattern in the S&P

Look at the chart inserted on the June 12 post below, “Cramer and One of My Five Lines in the Sand” and you’ll see the second trendline from the top at 1365.  When the market touched that level on Tuesday, I emailed Members the following yesterday morning:

“Yesterday, the market touched 1363 and then fell back. Let’s see what happens today after the Fed Meeting. We’re not alone in looking at this trigger level and, if there’s any positive signals out of Washington about more Fed easing then all those technicians could launch the next move higher. I, for one, will join the herd.”

Having set that hurdle saved us a lot of money because after hitting that level a couple of days ago, the market pulled back significantly.  If we had bought stocks on the expectation that the advance would continue, we would have been hurt terribly yesterday as near 90% of stocks declined as the market took its biggest hit in months.

Those who make decisions based on the news that the media decides to spotlight each day will continue to be whipsawed.  Yesterday, everyone was talking about double-barreled mauling of the market with Goldman Sachs’ bearish call and the across the board marking down of the major banks’ credit ratings by S&P.  Today, they’re talking about the market’s surprising resilience and how “the ratings agencies are always late”, “when they only reflect what everyone already knew” and “changing the rating on one company is important but adjust the whole industry changes nothing”.

But for those of us who take a longer-term view (like the chart in the June 12 post), we need as much of a downside confirmation before heading for the exits as we needed an upside confirmation.  The chart below identifies those two critical levels: 1360-65 for the bullish confirmation and 1260-1266 for the bearish confirmation.

Chart reading is a dynamic exercise as new data reveal new balances in the continually changing struggle between bulls and bears.  Interestingly, a new chart pattern has emerged as a result of the recent volatility: a flag sort of correction (descending parallel lines) coming off the March high.  Patterns like these are usually constructive as they underscore consolidation (or continuation) rather than reversal.  Furthermore, crossing above the upper boundary of this new pattern as well as the 1360-65 level only solidifies further the strength of the following upside move.

June 12th, 2012

Cramer and One of My Five Lines in the Sand

I informed Members in their June 3, Weekly Recap Report that “the market has been in a 30% trading range (1050-1365) as the economy works its way through the ruins brought on by the 2007-09 Financial Crisis.  While we’ve been glued to news stories about one crisis or another over the past three years, we fail to see that, underneath the surface, the economy and the market have been in a healing process.”

I included in that Report a chart onto which I inserted five critical trendlines, levels at which the Market has pivoted (reversed direction) from 5-7 times over the past two and a half years.  I also suggested that Members “click on the image to enlarge it, print it out and past it over your computer …. we’ll be looking at it throughout the summer watching for the turn.”

On CNBC’s Fast Money show tonight (to see clip, click here), Cramer revealed a bold prediction by Carolyn Boroden, a highly regarded technician on Wall Street.and one of his “favorite” technical analysts in an “Off the Charts” segment.  The analyst predicted that 1265, the point at which the market seemed to have turned up last week, would be a line in the sand.  It might actually turn out to be the low for the year followed by a run to as high as 1465.  That technical analyst based her interpretation of the chart mostly on Fibonacci time and level measurements which were beyond my understanding.  But what I found most interesting is that the levels mirrored almost exactly the trendlines I’d presented to Members two weeks ago.

Now that Cramer has pulled the covers off a market timing analysis that closely correspondents to one that I distributed to Members a couple of weeks ago, I wouldn’t be committing any breach with Members’ by now including that chart here:

Interestingly, Cramer and I aren’t the only ones having focused on the importance of the 1265 level.  Yesterday, in the Minyanville post The Single Most Important S&P 500 Level, Kevin A. Tuttle wrote that over the last dozen years, the SPX has crossed, retested, and breached this level 12 times.  According to Tuttle,

“When adding the melodrama and sensationalism, Wall Street scandals, global tensions, political finger-pointing, misappropriation of funds, struggling economics, quantitative easing, and the US’ skyrocketing debt load, it can become somewhat overwhelming to ascertain potential direction.  It’s the whole “forest for the trees” idiom. My firm believes that no single individual or institution has the mental capacity, intellect, or quantitative ability to comprehend the amalgamation of all global fundamental factors to derive a meaningful conclusion about the general direction of the market without employing the demand factor, or better said, the law of supply and demand.”

I, said as much to Members in my Report of two weeks ago.  I confessed that I
“…. don’t have enough time for that and throw my hands up when it comes to trying to evaluate and assess the potential impact of the news flow from around the world.  I find it overwhelming and I just don’t feel up to the task.  But I can look at the above chart and identify important levels where the supply and demand for stocks came into balance and created turning points in the past (even if temporarily) and may, with a high degree of probability, do so at the same levels again in the future.”
The low of last week may have been one of those critical turning points.  If it was, then it behooves investors to begin putting some more cash to work because the summer break may be short and the run to higher ground may begin sooner than most anticipated just a month or so ago.

June 4th, 2012

Revisiting 1970’s Secular Bear Market Exit …. Again

There are two kinds of investors: those who try to predict the market’s future direction from what they understand to be the truth of today’s events and those who try to understand past events and project them as models for what the future might hold.  In other words, those who view the market in fundamental economic terms and those who see the market in terms of supply and demand for stocks.  As you might have surmised, I belong in the latter camp.  I gravitate to the technical approach and look to the past for analogs that might guide me in looking at possible market direction today.

For quite some time, I’ve seen similarities between the end of the 1970’s secular bear market and this generation’s secular bear market that began with the Tech Bubble Crash.  I’ve been calling it my “Reversion to the Mean” chart.  For example, in “The Magic Number is Actually 7.5% per Year” from October 11, 2008, in the depths of the Financial Crisis Crash, I wrote:

“The good news is that …. the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be near very the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.”

And then on Obama’s Inauguration on January 17, 2009, I wrote:

“Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.”

Then, on May 2, 2011 in “Reversion to the Mean-Redux” I wrote:

“Following this track literally [superimposing the exit from the 1970’s secular bear market exactly on to recovery from the 2009 Financial Crisis Crash] means that the market could be heading into some murky water. We may soon stall out, retreat again and not see the current level again until sometime in 2013. If the recovery time frame over which the economy and the market took to come out of the 1970′s secular bear market were followed precisely again, then a new market high won’t be seen until around the beginning of 2015.

I have no idea and care little today to know what underlying fundamentals will be used to explain in the future the market’s then behavior. “Reversion to the mean” merely establishes the boundaries within which the consequences of all these underlying dynamics might ultimately be realized.”

Finally, this past January 30 in “That Old 1978-82 Analog Again” I wrote:

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

I guess we didn’t dodge the bullet since we’re just about back to where we were when the above was written.  But now, six months latter, what does the analog look like now (click on image to enlarge)?

The black line is the actual index and the blue is the projection based on the exit from the 70’s secular bear market.  The 70’s secular bear market low point was in September 1974 and a new high wasn’t established until 1980, over 5 years later.  The analog assumes that the low of the current secular bear market was the 2009 Financial Crisis Crash; overlaying the 1970’s track beginning at that low point produces a new high sometime in 2015.

In the Weekly Recap Report sent to Members yesterday, I indicated 5 possible support areas on which the market could pivot and begin another leg higher.  However, the sixth lower level is the bottom boundary of the “Reversal to the Mean” channel indicated in the chart above.  While the 1970’s analog foretells of a nice bull market to 2015 and beyond it also implies that the current correction could stretch all the way down to around 1000 in the S&P 500.

The similarities between the exit from the 1970’s secular bear market and today are many.  What we do know is that the exit process takes a long time.  Let’s hope that one of the trendlines indicated yesterday offer firm support and the market won’t need to revert all the way back to the lower boundary as it did in the months immediately preceding Ronald Regan’s election.

May 24th, 2012

Moving Averages: Trend Inidicator or Resistance/Support Level

There are almost many discussions in technical analysis circles as to whether moving averages are predictive and form resistance and support levels or whether they instead exclusively depict historical information (like, the average price of a stock over the past 200 trading days) and indicate trends (like, the average price over the prior 200 days continues to improve).  I’m not going to take either side other than to say you can’t use one to the exclusion of the other.  What I can say is that the 200- and 300-dma’s have performed extremely well as support over the past week (click on image to enlarge):

It could purely be happenstance or it could be that the close proximity of the two moving averages intensifies their support support capabilities or it might just be that a few more trading days will see the Index cross both moving averages indicating a dramatic deterioration in the market’s health and future prospects but for the time being it does break some temporary comfort and relief to those of us who are of the “technical persuasion”.

Where to from here?  Your guess is as good as mine.  But what I do say is that I’m relieved that I have a discipline that insulates me from all the speculation we’re bombarded with daily in the business media by neutralizing the day-to-day volatility and helps me focus on the longer term picture.  My Market Momentum Meter distills the market’s trend over a number of time horizons and translates the analysis into a single number which, when compared to experience over nearly 50 years of market data, indicates what market tactic (all cash or fully invested) which will like generate the best likely outcome.

My Market Momentum Meter is at the borderline and may soon suggest a more conservative, risk-off approach but for the time being it still indicates that the market’s longer-term trend continues to be “provisionally, moderately bullish”.

 

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May 21st, 2012

Echoes of 2009, 2010 and 2011

Today’s post features excerpts from the Recap Report I sent to Members this past Sunday evening. After seeing today’s (Monday) recovery, I thought it would be worthwhile for all blog readers also to see it.

As part of each Weekly Report, members also see the current position of the Market Momentum Meter and what extrapolation of alternative market trends in terms of S&P 500 levels over alternative time horizons might produce in respective Meter signals.  This is important for evaluating true market risk and portfolio strategies for dealing it.

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This week’s Report is very difficult to write. There was so much going on last week and the market acted so horribly. Europe was still a huge question mark, the over-hyped Facebook IPO was characterized as a disappointment (to all but Zuckerberg and about 1000 other insiders). Worst of all, the market had its worst decline of the year with a drop of 4.30%; the tech heavy Nasdaq Composite Index did even worse with a 5.28% decline. Stocks in the Model Portfolio fared poorly declining 5.95% but fortunately the 40% cash position cushioned the portfolio’s net drop to more constrained 3.92%.

This is the third year in which the market has tanked entering the summer months (the “sell in May” syndrome working overtime). The one consolation is that in both of those prior instances there was a respite and early stirrings of a recovery soon after the Index penetrated below the 300-dma (in time not in level). This Friday’s intra-day low touched the 300-dma and closed just above it (click on image to enlarge):

I know this looks complex with many horizontal trendlines but one can think of it in terms of the market climbing up a step set of stairs. Each resistance level that the market has successfully crossed above winds up later being a landing it steps on in preparation for the assault on the next resistance level.

That’s what may be happening again (speaking technically only and putting aside any discussion of the continually evolving fundamental causes like Greece, unemployment rate, declining price of gold, oil and other commodities, a harder than expected landing in China and the ever nearer Presidential election).

If this will be the third time around, then the current correction is close to the end/bottom. There may be another 2-3% left on the downside to 1250-1260 or to about the level of the neckline of the previous head-and-shoulders top.

As they say, there are harmonies (or echoes) in the market but never exact replicas. If this is the extent of the decline that the market suffers after having all this bad news thrown at it then the optimist in me thinks that any positive news on any front could result in a bottoming and reversal of direction again (and we won’t know what positive news it was that caused the market to reverse course until way after the fact).

Rather than thinking about how bad things could get, a better “contrarian” approach might be to think of this correction as our last opportunity to climb aboard the train that we missed climbing on three times before (2009, 2010 and 2011 bottoms). Some called the March, 2009 low at 666 as a “generational bottom” and it truly was. We had an opportunity to make up for being to fearful to act then in 2010 and again in 2011. This may be the next and hopefully last opportunity. Let’s not obsess above the bottom of the value and look instead to the climb up the other side to the market’s previous all-time high peak of 1576 made in October, 2007.

May 16th, 2012

The Difficult Choice

The times aren’t easy for market timers.  The market has declined around 6% since the April 2 peak of 1419.04 and the anxiety level is rising.  The question of every market  timers lips are: “Should we sell into this decline and, if so, how much?  Is this a collapse similar to the stealth bear market brought on by last year’s Federal budget deficit crisis, the S&P downgrade of US debt and the deepening lose of confidence in the Euro currency?  Or, as many have discussed before, are we merely going through a typical “sell in May” correction which, if we stay put, we’ll recover from relatively unscathed in the fall?

Contrarians might take the opposing side and ask “Should we take advantage of the opportunity presented by lower prices and begin to pick up some bargains while we have the chance?”  As the saying goes, that’s what makes a market.  Two diametrically opposing views leading to two opposite courses of action, both coming from the same set of facts.

Unfortunately, the chart of the S&P 500 doesn’t provide much insight as to the best course of action.  I first began surveying what I called a “congestion zone” on April 12 in “Identifying the Boundaries of Stock Chart Congestion Areas” and followed that up on April 23 with “The Lower Boundary is Becoming Clearer“.  Here we are, just over a month later, and without any clearer idea of what the boundaries of the zone are or whether we may have actually fallen through the bottom of the zone and began a downward trend.  The striking thing is the apparent similarity between March-April hump this year and the April-May hump last year.  Let’s hope the slide when the Index crossed below the 200-dma last year isn’t repeated this year.

The market index has fallen through the lower boundary of what could have been a flag pattern.  It fell below what I was hoping would be the neckline of a small head-and-shoulders pattern.  It fell below the 100-dma and is quickly approaching the 200-dma (which, coincidentally lies just above the 300-dma).  If last year is any example, then the selling could again be quick and deep.  But the recovery 4-6 months later was just as sudden and it may be so again this year.

The Market Momentum Meter was tested against nearly 50 years worth of stock market history and in the process identified the conditions (as reflected in the relative positions of the moving averages and the Index itself) under which exiting the market was the best strategy.  At other times, staying in the market, regardless short-term fluctuations, was the best long-term strategy.

So far, the Meter is still signalling a full commitment.  However, extrapolating further straight-line declines of an average -0.168% per day (the average daily rate of market declined between March 26 and yesterday’s close), the signal would turn a Cautious/Yellow when the Index hit approximately 1290 and a Bear/Red at 1240.  Coincidentally, those are the approximate levels of the 200-dma and of a long-term trend line that has been the locus of multiple pivot points since the Tech Bubble began in 2000, respectively.

Last year, however, the market’s decline was so steep and rapid that the Meter’s exit signal was too late.  Furthermore, the recover was rather quick so that it failed to signal a timely return.  Unfortunately, the difficult choice being faced is between violating our discipline and sticking to the discipline and risk further losses.

May 3rd, 2012

Rohrbach on Market Timing

I shouldn’t but I will anyway.  I shouldn’t whine but you’re all friends or you wouldn’t be reading this so I’ll borrow your shoulder to cry on and your ear to hear my complaint.  OK, here it goes, “I don’t understand why more of you haven’t subscribed?”

I happened across a series of interviews on Forbes.com with Jim Rohrbach of Investment Models about using moving averages to spot trend changes.  The essence of Rohrbach’s message is that:

  • “[You] can’t look into the future. If you can just identify when the trend changes, that’s all you need.”
  • “[Most traders] don’t know how to identify a change in the trend in the market, and it’s not that difficult, if you spend the time to try to figure it out.”
  • [most investors] are being told constantly by brokers, etc., ‘Don’t try to time the market…it can’t be done.’
  • [Rohrbach] “spent seven years working on the mathematics of that thing. I kept stumbling, but I finally came up with a way where I can take certain ingredients, which I’m not going to tell you what they are, and if I applied them to the mathematics, I could tell on a daily basis what the trend of the market was for that day.”
  • “Convert the action of the market into a number. That number represents the trend for today. If the market is going up several days in a row, that number will go up, and vice versa.  But you’ve got to know the ingredients, and you’ve got to use mathematics. Don’t listen to those guys on the Street, or wherever, who tell you the reasons for the market going up or down, because they have nothing to do with reality.”
  • “And you’ve got to stay in [Apple] if you’re really going to capitalize on this thing. If you get out because Apple dropped ten points today, that might be a big mistake…… Stay in, stay in, stay in. Even if the market goes down 200 points.”
  • “You don’t have to be smart. You have to be intelligent. You have to have a strategy that tells you when to get in and out….if you have something that’s worked for 40 years, then once you know where the market’s going, the trend of the market, then you can start playing around with individual investments.”
  • “Just play it with the market. It’s telling you—and I know that’s kind of difficult for the average person to do, and it’s also very difficult for them to have the discipline to act on every signal. Your emotions get involved in this game, especially when your money’s involved.”

I tell you all this because I want to demonstrate what I’ve been writing here about since starting this blog over six years ago are the same things that others in the know have been doing also.  I also studied the market’s action since 1963, almost 50 years worth of history, and came up with my own mathematical indicator as to the strength of the market’s momentum and direction; I call my indicator the Market Momentum Meter.

If market conditions remain relatively unchanged over the next several weeks, the Market Momentum Meter will approach a critical level early in June.  Members to Instant Alerts see what the Meter’s reading is each time I make a trade; each day’s reading is recapped in the Weekly Report.

Rohrbach charges $395/yr for his market timing service or, as he says, “about a dollar a day”.  My service is less expensive plus you can see how I translate my Market Momentum Meter into actual trades shortly after their execution.  I also keep track of the the performance of those trades in a Model Portfolio because market timing needs to be followed with a high success factor in stock selections (even the best in baseball strike  out once in a while).

The market is at a critical point.  Is it correcting or reversing?  Should you sell in May and go away or buy in anticipation of a market resurgence?  Become a member to see what I’ve done.  Don’t put it off, act now!

May 2nd, 2012

“Trading Around a Core Market Direction View”

Jim Cramer did one of his “I’m going to teach you ‘homegamers’ how to trade the same as I did when I was in my multi-million dollar hedge fund years ago” shows.  The point at which I was surfing through the show was when he was answering a viewer’s question about when to sell a winning position?  His answer was that if the viewer didn’t want to act like a novice trader, he needed to “trade around your core positions”.  But what does that mean?

According to the show’s transcript, the concept involves:

  • start by picking a stock about which investor has an opinion. They should believe the stock could go higher over the long term. It should be a great underlying company with a stock that could get tossed around by market volatility, but nevertheless has potential to push higher in the long haul.
  • Each time the stock jumps 3 percent, the investor sells 16% to make some profits and continue selling shares as the stock advanced until the position was reduced by 50%.
  • At that point, the investor would wait for the stock to be knocked down, so they can buy more shares.  When the stock declines 6%, the investor would buy back 16% and continue buying in increments until the original position was repurchased.

According to Cramer, “A lot of people think that trading is incredibly exciting and it can be, but if you’re good at trading around a core position, you should be pretty bored because all you’re doing is watching the stock move and trimming or adding to your position accordingly.”  It sounds simple enough but, I’m sorry, the market isn’t that accommodating and unless your portfolio has less than a handful of stocks to follow it sounds like just to much trading.

Rather than watching the daily trading patterns of individual stocks, I like to “trade around a core position” where the core position is my total portfolio and the trading is making essential a single investment decision: “How much should be invested and how much cash should remain at the present time.”  What I’ve found is that investing is essentially a risk and cash management strategy.  There are times when you should be fully invested (or more so when using margin) and other times when you need to be 100% in cash.

I arrived at that conclusion by watching the action of individual stocks and my total portfolio as compared with the S&P 500 Index.  What I’ve found is that the odds are that stocks tend to follow the market’s general direction; they may vary in degree but the direction of the movement is usually in the same direction.  Regular readers are familiar with a saying that I’ve quoted here often: “50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.”  Here are several examples from today’s trading.  The blue line is the S&P and the black is the stock on a on minute chart:

  • TKR
  • EOG
  • CE
  • ALGN
  • LLTC

I could go on and on but you get the picture.  When the market goes up, most  stocks will go up; when the market goes down, individual stocks will likely go down.

Bottom line, it’s probably more important having a good sense of what the market will be downing this minute, this morning, this week, this month or the next six months than it is trying to predict what individual stocks will be doing.  Rather than timing sales of individual stocks by the price action of that stock,  it’s probably more worthwhile tying that transaction to what the market will be doing.  Rather than selling a stock because it’s gone up 10%, 20% or even 50%, you should time the sale to the health of the market or industry group.  Conversely, time purchases according to whether the market will be firm or if it’s on the verge of correcting or reversing.

“Trading around a core position” can lead to either major opportunity costs in lost profit or real losses from buying into a deteriorating stocks or market.  Figuring out market direction is probably time better spent then finding stocks with the most ideal stock charts.  When the market is rising it’s more important to throw money at a diversified portfolio (or even into index ETFs) than trying to find “the best” stocks to buy; when the market is falling, getting out of the way is more important than trying to decide which stocks will survive the downdraft and which won’t.

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April 23rd, 2012

The Lower Boundary is Becoming Clearer

Less than two weeks ago I wrote ““Identifying the Boundaries of Stock Chart Congestion Areas” in which I talked about three potential bottom boundaries of the congestion area that was developing and might eventually turn into a recognizable chart pattern.  With time, the emerging chart pattern is becoming clearer and, I must add, a bit more worrisome.

 

The discussion of “boundaries” is actually at the core difference between fundamental and technical analysis.  In fundamental analysis, analysts look at the slowing Chinese manufacturing index, Spanish debt refunding, elections in France and the upcoming U.S. elections, this quarter’s corporate earnings reports and the guidance for the year, upcoming Fed meetings, jobs reports, etc., etc.  Those analysts would then attempt to distill and prioritize the voluminous and disparate data facts into a consistent picture.  Finally, they will translate that picture into not what it means today, where it all might be headed in the future and what the impact might be on the stock market and individual stocks.

Needless to say, there are about as many divergent opinions about each of these data points as there are analysts willing to speak about them.  Some of those opinions are meaningful and reliable while most are guess that are about as useful as yours or mine.

Technical analysts, on the other hand, focus more on the actual decisions continuously being made by millions of investors, whether rightly or wrongly, rather than the reasons for their having made them.  They look at the continually changing balance (or imbalance) between supply (sellers) and demand (buyers) as reflected in transaction prices and volumes.  The primary focus begins with whether that balance is shifting on a continuous basis in one direction or another because when that imbalance starts it tends to be self-perpetuating, reinforcing and continues for some time (i.e., momentum).

The market, after having risen nearly 30% since October, is currently almost perfectly balanced between buyers’ demand and sellers’ supply.  Based on investors’ various interpretations of those fundamental facts, nearly an equal number see the facts portending a bearish future as those who see the facts leaning in a more bullish direction.  In other words, about as many see the market glass as half-full as see it half-empty.

Our search for boundaries is an attempt to learn when that equilibrium balance starts tilting in one direction or another.  Sometimes the balance continues for a few weeks and sometimes it takes months.  In the last post, I inserted three possible bottom boundaries.  As a result of today’s severe open, one of those supporting trendlines was penetrated; if there isn’t a quick strong bounce before the close and into tomorrow, then more downside can be expected.  If the demand is insufficient to absorb the supply of those investors who see a pessimistic outlook then the market will break below both of the remaining support levels and will continue lower until a new equilibrium balance forms at lower levels.

March 26th, 2012

“Sell-in-May” in 2012, too?

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:

  1. 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.
  2. 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.