In the near term, specifically over the next few weeks, I cannot help but be bullish. Therefore, I am officially changing my bias from short to long. Mr. Jeremy will hopefully see fit to remove the Bearshitter from my banner, given my near-term sentiment change.
Will the market go up or down, over the next month? I suspect up, but that is just a hunch or an intution; some might even consider it a guess. The odds of such a move are probably no better than 50/50. However, the reward/risk for trading a possible move up can be better than 2:1, using current support levels as a stop area.
Regular readers may remember my calls a couple of weeks ago that the Nasdaq would see 2000 and the Dow 11,000. I still think that is probable. However, I think we will move up first. Let me explain why.
First of all, I feel very strongly that we will remain in a protracted bear market. I do not think that earnings or the economy will recover in the 2nd half of 2008. But, as I’ve said before, I’m a technical analyst, not an economist or a fundamental analyst. The technicals show that the indexes could experience a significant rally, and still not break the primary downtrend. Such a development will be bullish short term, but will not violate my principle belief that we are in a bear market.
In 2000, it took approximately 9 weeks for the Nasdaq Composite to regain its 50 day moving average. It then traded above the average for the better part of 12 weeks, before again breaking below the 50 day. On the second break of the 50 day average, it proceeded to trade beneath this average for 19 weeks before again breaking above it. I expect a similar type of scenario to unfold over the coming weeks and months.
 We just witnessed the failure and implied bankruptcy of one the top five broker/dealers. What was the market’s reaction? Well, the crowd went mild. When we witness the destruction of a financial instution on the level of Bear Stearns, and the market does not follow through with a negative reaction, I am at a loss as to what could drive the markets to new lows, in the near-term. Long term, I see a dearth of consumer spending and weak earnings driving the indexes to new lows. However, it will be a while before there is enough data for that scenario to become reality.
There will be constant risks for the bullish, such as the failure of another financial institution. I do believe that the Fed’s recent action will be enough to stave on any more crises, for at least a few weeks.
The headline risks are also present. S&P downgrading [[LEH]] and [[GS]] comes to mind. But seriously, what the hell is a downgrade going to do that a bankruptcy could not? And who believes anything from the S&P? There is always going to be the opportunity for negative economic reports, such as the GDP on Thursday. In the near term, I feel that any bad news will be treated as good news, and we will hear plenty about events being “priced in” and “the market looking six months forward.”
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I plan on scaling in to [[DIA]], [[SPY]], and [[QQQQ]]. I will use support under each index as a guide for stop placement. As my thesis is that the indexes are finished retesting lows for now, I do not want my stops placed beneath the lows. Rather, I want them just under recent support, $120 for DIA, $42 for the Qs, and $129 for the SPY. If these levels are busted, the market is still wanting to test lows, which will invalidate my plan. With stops at these levels and purchases near Thursday’s closing prices, the reward to risk on these can be 2:1 or better.
If the indexes can regain and hold the 50 day, then I will add to the positions and move my stops up.
Let me reiterate that I’m still bearish long term. Technically speaking, the short term momentum is moving in favor of the bulls. If one looks at bear markets, there are always rallies. Those who do not see a rally in the near term should be asking themselves what exactly will keep the indexes from a rally?
Bonus Read: An interesting primer on Bear Markets from Schwab: A Bear of a MarketÂ
RIMM & AAPL time, they both will be 10% higher in a month.
You may be correct.
However, I doubt it.
WODDSHEDDER TOP?
My thoughts exactly… could be the Woodshedder Top.
Shed, I have to say it, you going over to the bullish side temporarily is like finding out your boyfriend is gay, but probably just for a couple of weeks while he experiments, and then he’ll be back to normal. Suuuure. Not that I’ve experienced that of course.
Fly, is this the real fly? Usually you are “The Fly” and your ip address is not jiving.
Anyway, Cajun, AAPL has some real resistance at it doorstep with the 50 day. More on that later.
Boca- lmao. Let me finish my post before you all make your final judgment. Off to eat some ribs, then more analysis later.
Woody –
I closed all my shorts last week. Its the first time in ’08 that I have not had hedges or outright shorts.
If nothing else, I’m just exhausted from playing the downside.
btw – that has to be a Bogus Fly
Leawood- yeah, I’m exhausted from the downside too. Likely, many others are as well. What are the chances that they go to more cash, stop trading, or start buying?
Shed, your charts are great. Your conclusions are always clear, reasonable and succint. Usually I would agree with you, however this time I just can’t get past the major amount of suckitude I see in the economy, and have to wonder if it’s a bear trap. I’m sitting this one out. Maybe it’s battle fatigue.
Boca thanks. Although me thinks you meant bull trap, rather than bear trap.
If so, it will be a very big bull trap, and that is exactly how I intend to trade it.
haha yes I did mean bull trap, thanks. It’s been a long day.
That was me.
I was away.
The Naz stopped exactly at the EMA(21) on Friday, which is where it has been stopping every rally since February. I’ll admit there is potential for a nice rally from here to the 50-day, but it also could very easily head back down.
Let’s see what happens Monday. It either breaks out or breaks down.
Wow, the Fly reads my blog, when he is “away.”
Dog- I almost included the 21 day average for you. I always use the 20 day during uptrends. In this downtrend, it seems to me that most traders have been focusing on the 50 and 200 day.
I know the 50 and 200 are the usual focus of attention, I just can’t ignore the 21’s ability to stop a rally. For me, that is the first line of resistance that needs to fall, which may happen Monday.
nice article shed. I agree.
Shed – I am doing something similar to what you mentioned.
Do you know the oscillator I talk about occasionally? I have backtested it further and found it to have significantly less volatility that the market itself at 10.5%. It also gave you a higher return (10% for 2007 vs. 6.3% DJIA) and for 2007 had you invested long on 74% of the days.
Accordingly, I put 20% of my money in an account that solely trades its signals to buy or sell the index. So we’ll see what happens.
I have MM rules incorporated into the system such as stop loss, position sizing, etc. Even a HPT style gap down wouldn’t cause much of a capital loss due to the overall position size.
The goal of the indicator is to keep you in the market when it is good (moving up), and out when it is bad (flat OR down).
According to the system, I went long an ultralong on Fri.
If you are interested, email me, and I’ll send you the signals as they come. You can do with that whatever you wish, but I would be interested to do a test of when my signal says sell versus when you would sell based on your TA signals.
Wood–
nice job.
I’m with you on this. My signals are starting to flash “get ready to buy”.
Top of the Woodshedder, it is, most definitely.
“You’re gay,” Yoda’s signals flash.
Yoda, candled your small, green marbles, the market did today.
Alpha, I was surprised at the strength today.I added only a small amount of MBRK. I missed the opportunity to get long this morning.
I haven’t had a chance to check volume or breadth. If they were positive, I’ll probably look to get long on a pullback to the 50, as my plan has been for months.
Enjoyed it, I hope you did. Cozy, Yoda’s man ovaries are.
Inspect the “selling into strength” phenomenon, you should.
Advised my paduan, Danny, about this, I did.
Too old for Sith, you are, I fear.