Tuesday, January 10, 2012

A resolution to the upside

Hi there, and welcome back to CRI's S&P 500 blog.



After taking some time off to visit with family I am back in the saddle to comment and guide readers through these tumultuous markets. And what greeted me first thing yesterday morning was a surprisingly bullish tone to the market. They often say that January's price action will give you an indication of what to expect for the remainder of the year (known as the January Barometer). With this in mind, I will be closely watching how January plays itself out. Additionally, we are now into the second week of Q1, 2012 so I will be watching how each sector finishes the week for an indication of where international money managers are putting money to work. The more I do this (I'm now comfortably into my 17th year of being a full time student-of-the-market) the more I find it interesting how we move from one market cliche to another. In this case, I am reminded of Don Vialoux's addage..... buy when it snows and sell when it goes.

So Lets review how our two primary camps ought to be positioned:
Traders: Interestingly, both traders and investors got good looking buy signals four weeks ago, each for their own reasons. Traders ought to have bought the steep double bottom formation where the long trigger was the high of 126.46 (from the week of December 5th). This occurred through the end of the week of December 19th. Santa Claus came this year, indeed. Targets on this trade should be in and around the 131.00 area [Bull flag formation: (126.46-115.47)+120.03 = 131.02]. Stops on this trade ought to be just below the recent significant lows of 120.03.
Investors: As indicated above, investors finally got the signal to get back into stocks through the week of December 19th. This signal was generated when the short term moving average (13 EMA) crossed back above the slow moving average (30 SMA). And again, this signal was generated when the market broke back above the early December highs of 126.26. For those that missed the initial signal, look to buy half your position now and use any pullbacks to add to the position. I do see a rather noticeable gap at 125.50 that was left just a couple weeks ago. My hunch would be that that gap will be filled at some point in the not too distant future. With the move though 128.60 just this week, we now have a rather large upside target of 138.32 [Bull flag formation: (128.6-106.75)+120.03 = 115.47]. Yes this number does seem a bit extreme, but as we head into the typical seasonal peak of late spring, I wouldn't be surprised to see that number hit. And as Don suggests, Sell those stocks when that snow melts!!!

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