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Strategy for the Return of Merger Monday


[Danny DeVito in Other People’s Money (1991)]

Breaking News via Bloomberg: Thermo Fisher Said in Exclusive Talks to Buy Life Technologies for more than $70 a share (Source)

It is hard to envision the end to a bull market without a steady stream of mergers & acquisitions like we saw towards the end of the 2003-2007 cyclical bull; It is just part of the psychology you see from corporations as markets rise. Corrections can and will come, but the AAII sentiment survey last week revealing extreme bearishness sure does seem to contradict any calls for a complacent cyclical bull market top.

Nonetheless, even if “Merger Monday” does not come back in full force, being fully prepared for the trading week is essential.

With this in mind, here is an excerpt from my Weekly Strategy Session, which I published and sent out to members earlier today. Keep in mind, it is just a very small portion of the full Strategy Session. 

To read the full version, and to see an alternative thesis, please click here for details .


Updating the S&P 500 weekly chart which I presented to you last week, I am going to address three key points to have in mind for the week ahead.

1) The 10-week moving average (light blue line, below) which we looked at last weekend as holding during the sell-off, remains a key piece of the puzzle that not many traders are watching–Which further enhances its relevance to us. Given that price has shown us how sensitive it is to it, we are going to continue to resist the urge to turn bearish at least until that reference point is lost. Even if lost, it would not be incredibly bearish intermediate-term (it is still clearly inclining), rather just an indication of a slightly deeper correction at hand. Also recall from these Strategy Sessions back in late-February when we looked at the 10-week moving average providing excellent support for the Russell 2000 Index and the financial sector during that brief corrective period. Note that the 10-week moving average is currently at 1545 on the S&P and is rising.

2) The S&P could easily push higher yet and still not be very overbought, since price has quite a ways to go before breaching its upper weekly chart Bollinger Band. Bollinger Bands can be useful, in part, for measuring relative tops and relative bottoms. Piercing the upper Bollinger Band on a weekly timeframe is a relatively rare occurrence for a major index and indicates extreme strength on the part of bulls, albeit at the cost of becoming quite overbought short-term. Here, Bollinger Band analysis compels us to keep an open mind to the idea that price could easily see another leg higher in the coming week.

3) Should the 10-week moving average be breached next week, again consider a deeper pullback down to the purple trendline I have drawn dating back to the lows of the November 2012 correction. That would likely be the type of “reset” which many market players seem to be craving. On its face, it need not be a bearish development, either, looking out several months.

(Also note all weekly moving averages are rising and lined up properly [20 period weekly, then 50, then 100, etc], indicative of an established uptrend still in full force)



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