Hi there, and welcome back to CRI's S&P 500 blog.
The double bottom that came in on the SPY over the late summer has indeed put a floor under stocks as we head into the mid-term US Congressional elections this November*. All major decisions regarding US Federal fiscal policy have been put off until the next Congress, and the US Federal Reserve has signaled that it will keep monetary policy loose for the foreseeable future and may even embark on yet more quantitative easing (which is just a fancy way of saying they may be printing more money). This has laid the current market backdrop.
1. The market believes inflation is not a threat
2. The market believes no-one is going to end the party until after the new year (and then there may be some really big changes)
Within this vacuum, prices ought to continue on their prevailing path. Stocks, bonds and commodities higher - US dollar lower. Ironically, this move could be quit dramatic considering the substantial bearish sentiment that was built up over the summer. Having said that, once on the other side of the event I would be reluctant to initiate any new positions. But hey, that is over three weeks away - and in that three weeks we may see some impressive moves...
Technical picture:
Two interesting developments through the month of September.
1. A double bottom in the price of the SPY was registered (refer to the A-B-C-D pattern outlined above). This price pattern (often refereed to as a 'W' price pattern) suggests there is substantial demand for stocks between 100 and 110. So much so that the supply has been overwhelmed and price has had no choice but to move higher in an attempt to find more supply. Traders will use this price pattern as an entry level. They will buy at the top of the range (in this case 112.58) and risk down to the bottom of the range (in this case just below point C or 103.73).
2. Our time tested moving average 'investor-signal' (that being the relationship between the weekly 13 EMA and the 30 SMA) is suggesting prices want to move higher and investors ought to participate. Interestingly here, the cross came at almost the same time as the double bottom. This in itself would be enough to pull me off the sidelines and I do believe investors ought to be long the market again. Specifically, one ought to be long from the 113 area. If not currently long then work open orders around this area.
So what does it all mean?
As has been the case since the late summer, one ought to be bullish and invested. I have talked extensively about the metal markets and that happens to be where my money is working currently (for more on these trades please refer to
CRI's OnlyDouble's blog or
CRI's CTS blog) but make no mistake....I'm long. I would not be surprised to see a dramatic blow-off top into this event and there is money to be made.
Specifically with regard to SPY, one ought to expect the 120 level to be tested in earnest and even broken. If this indeed happens, one ought to be looking for a continuation up into the 130 area but we will cross that bridge when we come to it...
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
*
CRI course note:
Statistically speaking, when one sees a well defined double bottom price pattern [I have found over the past 20 years of doing this] that price will rise above 75% of the time. This is important because remember our '2 Rules of Investing' (1. use a system that is accurate 66% of the time and 2. don't risk more than 5% of your stake on any one single trade).
