Knowing When to Go for It

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Some of my loyal readers may remember a series of posts that I wrote last summer analyzing IBM in multiple timeframes, stretching out to the monthly look. The stock had been bumping up against the low-to-mid $130 price range for over a decade, and yet there I was in the depths of last summer’s 16% correction calling for a significant breakout from one of the legendary blue chip stocks of all time.

Actually, this is what I wrote in reference to the monthly chart back on August 8th, 2010:

The monthly chart, seen below, puts the puzzle together, as we see just how sensitive the stock is to its prior highs over the past decade. Indeed, as the saying goes, price has memory. Compared to the previous times when the stock has been up above $130, this time the stock is consolidating in a much more orderly way. Again, this supports the idea of big move coming. The evidence suggests that move will be up and out, rather than a total collapse.

I then applied the thesis to the broad market and the implications from “Big Blue” breaking out over the next few months, and the only conclusion to draw was that the market was on the cusp of a major leg higher. You can see the full post here.

So, is now the time to make another bold call on Big Blue and the broad market? I am afraid not. As you can see below, the stock has been exceptionally strong ever since clearing the huge $130-range barrier last year. IBM endured the summer crash with remarkable resiliency, and has essentially gone nowhere, net-net, since May. I do not believe the breakout point from last summer necessarily needs to be retested, given how many years the stock came to terms with it before conquering that level, although that 20 period monthly moving average rising up to $150 could easily be tested.

So, we are left with what is likely to be a scenario of going sideways to digest the multi-decade breakout to all-time highs. All things considered, given what has transpired this year, that is not too shabby for Big Blue.

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Plain and simple, there are many strong individual charts out there (I will discuss them on my market recap today).  It seems as though we are trapped inside a huge sandwich of headlines and news flow out of Europe, which is why I am sticking with my plan of methodically (partial position starters) layering back into the market on the long side. Copper is an issue, and is one of the bears’ best arguments here, adding to the “sandwiched in” feeling.

More on my recap…

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$120 on SPY (roughly equal to 1200 on S&P 500) up top for resistance, and a series of higher lows since this morning down for the support trend ine. Watch for a resolution out of this predicament to determine what your next directional move should be.

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As you can see on the weekly chart below, copper mining giant Freeport McMoRan has given back almost all of its gains since last September’s initial move from its 2010 lows. The 200 period weekly moving average (yellow line) now essentially represents the proverbial last line of defense here. The bullish spin view on this breakdown today is that copper had been hanging in relatively well all summer, in the sense that at no point during the late-July/early-August crash did copper meaningfully take out its May lows (while we know the S&P 500 most certainly did). Now, with copper finally rolling over today and underperforming equities as a whole, perhaps this was just an inevitable event that needed to occur before the market could march on higher.

Whether the bulls are correct in that thesis or not, I am reluctant to put as much faith in Freeport as a leading market indicator, or “tell,” at this point given the events over the past few months.

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On Friday I wrote a post mentioning how I would welcome several days of boring, sideways action in order to better set up a multitude of charts that remain loose and sloppy. With copper and Freeport McMoRan tanking this morning, outpacing even the broad market sell-off to the downside, the sideways scenario is obviously not in the cards to start the week.

The bulls are looking for the now-rising 20 day moving average on the S&P 500 to act as support, currently inclining from 1183. Moreover, they can also point to some large cap tech and retail/consumer discretionary names like AAPL CMG DECK LULU as doing an excellent job of significantly outperforming the broad market thus far today.

To my eye, the big story is copper here. The issue is whether copper is finally rolling over after showing relative strength at various points throughout the summer, or alternatively if it is leading equities on a fresh leg lower. I have often used copper as a leading indicator for equities over the past few years, but these past few months has forced me to reevaluate that thesis. Either way, the overall action is nasty and not consistent with a boring, sideways market digesting last week’s gains in a benign manner. Whether this is a one-day phenomenon or the beginning of a big move lower may very well be conveyed by how we close today.

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