Sunday, May 13, 2012

The Bull Needs To Take A Break

Hi there, and welcome back to CRI's S&P 500 blog.
The seasonally positive window for assets in general and equity related ones in particular has begun to close.  As suggested recently, those long the breakout trade from last fall ought to have been stopped out of their long positions when the market broke the 135.76 lows (marked as point A on the chart above). Since our Investor signal (that being the relationship between the weekly 13 EMA and the 30 SMA) is still sitting rather bullishly; I am reluctant to consider the current pull back anything more than a correction within a broader move higher. Should that moving average relationship change (over the coming weeks/months) our collective stance on equity investments will change - but that is not the case at present.

So if I believe price is correcting, were we ought to expect it to move to? Since there are both a 50% retracement target and a rather noticeable gap around the 125 area, that shall be my short term target going forward (point B on chart above). That represents about a 12% correction from the highs and is historically 'normal' given the upcoming seasonal pressures. Should all hell break lose, my secondary downside target will be a test of the entire uptrend (and another significant gap) in and around the 115 area (point C on chart above).

Traders Stance: Either flat and enjoying the nice profits from being long through the seasonally bullish window or if one must, short from the break of 135.76 (with stops just above the recent highs at 141.66). This would represent a six handle risk for a ten handle profit potential and frankly I wouldn't be surprised to see the trades run those stops. One probably ought to try and get/be short from above the 137.5 area expecting them to run it to new highs. A stop above the 142.5 area would represent a $5 risk for a $12.50+ reward (or about 1:2.5). The market may not rally back up to the 140 area and I might miss the trade but I like the risk reward ratio better by being a little patient if I must be short - which really I am not leaning to be.

Investors Stance: As investors we were given the 'time to get back in' signal more than five months ago. Even with the recent pullback that represents a  7.5% capital gain. With dividends, this represents a very acceptable return. While no Investor sell signal is close, based on the chart analysis above, one ought to expect to see some more softness in the coming weeks and that capital return may 'come-in' a bit more. Having said that, that softness isn't necessarily a bad thing. Indeed, what we may find is that the next significant low represents a place where we as investors can move our collective stops and 'lock-in' profits over the longer term. Markets just can't keep going up indefinitely. Like stair-cases, there is a rise then a pause, then a rise, then a pause. For now, our 'Investor signal' is still bullish and therefore we must consider this a 'pause' and nothing more.


That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
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