Four weeks of consolidation leads to new stops

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

The ten week breakout that preceded the US mid-term congressional elections is now in its fourth week of consolidation. Some simple technical targets suggested the market had three significant support zones (the 117 area, the 114 area and finally the 112 area). Considering a natural 50% retracement of the ten week rally would have brought prices back into the 113 area [(103.73+122.95)/2=113.34] that was CRI's objective on this latest wave of selling. The move into the low teen's didn't materialize as both international tensions (Korea, Ireland) and domestic tensions (repeal of George Bush's tax cuts) seems to have melted away. and while everything seems cordial in Washington these days, I might be inclined to chalk the current market up to a combination of lame-duck old Congress and an early Sanata Claus rally. Regardless, enjoy the higher prices while they last.


Our most recent lament about the market concerned the fact that while the most recent buy signal was indeed correct, it left us long the SPY from 112.58 with stops remaining at (or just below) 103.73. The four week consolidation (which registered a significant low at 117.59) has now given us a new level to move our collective stops to just under. Going forward then, those that did buy SPY at 112.58 ought to now have their stops sitting just below the lows of three weeks ago at or near 117.58. Should we get a reversal in the next couple of weeks (highly unlikely) then this would actually turn into a shorting opportunity....but we will cross that bridge when we come to it.


Ideally we would live the market to consolidate for another week, then break higher. If that does happen then we would have completed a natural 5 week consolidation after a 10 week rally. Additionally, this price pattern would represent a very short term bull flag pole formation and would suggest prices want to get up into the 136.81 area [(122.95-103.73)+117.59].


but lets not put the cart before the horse...

Summary


The market registered a significant 'trader' (double bottom breakout) and 'investor' (13 EMA crossed back above 30 SMA) buy signal when prices crossed the 112.58 level back in September. 


If one were to be long SPY, one should be long from 112.58 with stops just under weekly support at or near 117.59. Tech., Basic Mat., Energy were 'Q310 1st 2 weeks best performing sectors and that shall be where I will concentrate my trading efforts over the coming few weeks into the end of the quarter. OnlyDoubles trades have been tearing the market appart (3 doubles in October alone!) and is well positioned to take advantage of any move higher should it ocure.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com