A healthy pullback in a big bull run

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



The broader US stock market (as measured by the S&P 500 stock index) has enjoyed a nice rally off its lows of 2009. Indeed, since our 'investor' buy signal was registered last April 27th, at 86.50 (that being a bullish cross of the 13 week exponential moving average moving above the 30 week simple moving average) the market has rallied some 27% [(110.23 - 86.50)/86.5] in less than a year. Believe it or not, this is rather normal for post correction rallies. Think of the 50% rule and you will understand what is going on. Specifically, a 50% retracement of the entire two year bear slide would bring the market back to 112.31 [(157.52+67.1)/2]. Currently we are within 2 points of that number, incredible isn't it!!! It is interesting too, to see the significant resistance that has been built into the market at/near this important technical level. These include the major lows of the spring and summer of 2008 (115.68 and 120.31 respectively) and the 200 week SMA (117.82). So considering we have exceeded the 50% level at 112, filled in the noticeable gap at 107 and have now failed in a significant resistance zone (115.68 to 120.31) I think it is safe to say, the easy part of this market rally is behind us. Indeed, one can't help but get the feeling we are fast approaching an end to this 'bounce' period. Governments around the world seem less sympathetic to the market. Weather it be in the form of tougher regulations or in the form of higher borrowing costs going forward, the 'tone' seems to be subtly changing in this market commentators opinion.

Having said all that, one must not put the cart before the proverbial horse. As of printing, the market has NOT broken down (from an 'investor' perspective) and one must continue to look for higher prices over the course of the coming months. Should the 13 EMA cross back below the 30 SMA our 'investor' stance shall change but it hasn't so we remain cautiously bullish.

While this market indicator remains bullish we , as 'investors', must look at swift downward moves in the market as healthy corrections. Indeed, this current 3 week pullback comes on the heels of an 11 week rally. Simple cycle analysis suggests corrections are often half the duration of primary moves. So one ought to be looking for a 5.5 week consolidation before we can move forward in earnest. Or looking at it another way, we should be looking for this correction to continue for another 2.5 weeks. As for targets, the very noticable gap left on the chart at 106.82 ought to be filled. Our low last week went into the gap (107.22), but it did not fill it totally. As well, the 30 SMA currently sits just below 106 suggesting more support in and around that area.

So what does all this mean...

I remain cautiously bullish heading into the spring of 2010 while looking for another 2.5 weeks of consolidation in the short term. I think upside potential is limited but still there. And any rally ought to be considered a selling opportunity to take profits on stocks picked up last spring and summer not a new 'investor' buying opportunity. Yes, the 'traders' of the world will make money on the seasonal swing but this blog is more for the 'investors' of the world. 'Investors' should be long from the 86 area (on SPY specifically) and looking to take profits. Once the seasonal window closes (May-June) It is my prediction that we will be issued an 'investor' sell signal and see the market take back the 2010 gains and maybe even a good portion of those of 2009 as well.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Still pointing higher...

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



As we head into the 10th month of this recent market rally, one can't help but get the feeling the bull is running out of steam. Ironically enough, all we have done is rally the market back into resistance and into the lows seen through the summer of 2008. Indeed, the low of July, 2008 is proving to be a most formidable resistance point as those that missed the original sell point (at or near 115.68) are doing so now. Couple this with the 200 SMA (currently near 117) and one has a virtual brick wall of sellers waiting to hit the bid.

In the short term (for traders) one ought to expect the gap at 106.82 to be a solid target on the downside. That would represent a 7% correction from the peak and would bring us back into the 30 SMA support area as well.

In the medium term (for investors) one ought to be looking at this pull back in price as removing some of the excess enthusiasm the market has a habit of pricing in. Our investor 'buy' signal came in last May (from 85 area on SPY). Because the 13 EMA is still well above the 30 SMA we have no choice but to remain bullish and ultimatly look for higher prices down the road. Should that relationship change, our investor stance will change appropriately.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Working our way up into targets and resistance

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



As per my most recent posts,
'the market is moving higher and I am looking for that to continue...and'...because the 13EMA is higher than the 30SMA we must be looking for higher prices for the time being. Should that relationship change, then our 'Investor' stance will change appropriately.' I am and will continue to be bullish on equities going forward. However I must raise a cautionary note to any new readers and/or new investors. This recent rally is, in my mind, a classic 'dead-cat-bounce' that has taken us from 'the brink' back into resistance. THIS IS NOT A BULL MARKET. Please understand this going forward.

This week I thought I would include a chart of the market (expressed through the S&P 500 depositor receipts, SPY) with an overlay showing the waves of this bull run (blue dotted line). One technician, R.N. Elliot, theorized that bull market moves happen in three waves. (learn more about Elliot wave theory on Wikipedia here). Considering where our target box is, a final climactic 'blow-off' top into the 120 area seems to make sense. My hunch is that will happen some time in the first quarter of 2010. That is several months away and I think a realistically achievable target. In the short term however, the market has moves substantially away from both the 13EMA and the 30SMA suggesting there is a growing risk of a short term correction. Since there are annual profits to be had by selling stock, investors may find a last minute 'rush to the exits' correction occurs because of nothing more than tax reasons...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Bounce off the bottom

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



As per my most recent posts, the market is moving higher and I am looking for the market to move even higher still as we head into the end of 2009. Because the 13 EMA is higher than the 30 SMA we must be looking for higher prices for the time being. Should that relationship change, then our stance will change appropriately. Specifically the 120 level looks like it will represent the next significant resistance area as the upward pointing channels and the 200 weeks SMA are both in that vicinity.

This week I thought we would take a look at the market from a little longer time frame. Above is a 3 year chart of the SPY (S&P500 Index depository receipts - in essence, our best/easiest/least cost proxy on the US stock market). There are three things that jump out to me when I look at this chart and I thought we would take this week to review.

1. The bear market 'sell signal' was flashed back in Oct/Nov 2007 (The Weekly 13EMA crossed below the 30 SMA on Nov. 12th, 2007). Subsiquently the market put in a weekly double top and confirmed this formation the first week of January, 2008 when it moved below 135. So there is no doubt about it, 'the financial crisis' was telegraphed and anyone who was paying attention should have been properly positioned.

2. The bull market 'buy signal' was flashed back in early May (the week of May 4th, 2009) when the 13 EMA crossed back above the 30 SMA. The market later confirmed this signal when (in the week of July 20th) price 'broke-out' registering a bullish Flag-pole formation. Again, through the late spring and into early summer of 2009, it was clear the market was moving higher and that the bear slide was over for the time being.

3. The bear slide (from peak to trough) was almost exactly 18 months in duration. During that slide the market lost 56% of its value (from 151 to 66). The subsequent rally has been almost exactly 9 months in duration (about half of the bear market period) and has rallied about 70% - but more importantly - has rallied almost exactly 50% of the bear slide value. So the recent rally has been at almost exactly the same pace as the sell-off. Who says the market doesn't move symmetrically...

Conclusions: Nothing I have seen in the past few years leads me to believe that there is anything different to this current market vs. previous bear markets. Prices fall, then bounce, then retest the lows. Currently we are in the 'bounce' phase and I do believe that is nearing an end. Investors should temper their enthusiasm since we are still very well contained within a massive bear market and within a few percentage points of significant resistance.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Upside Targets Start to Emerge

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



As this up move in the market reaches into its 8th month one gets the impression things are building to a climax. Government stimulus measures have been enacted, economies have responded and talk of new bubbles in some areas of the world have begun in earnest. With that being said, the charts have suggested being long the market (our signal line being when the 13ema crosses back above the 30sma - which I have talked about at length in previous blog entries) and are NOT flashing sell signals as of yet.

While I have suggested in my most previous blog entries that the market wants to move higher, I myself have been relatively neutral since we hit the two previously prominent upside targets (the gap at 107.5 and the 50% retracement level at 108). I continue to lean towards wanting to exit the broader stock market as I believe we are in the 7th or 8th inning of the most recent bull run. But just because we are near the end, doesn't mean we are at the end... So with all that being said, lets take a look at what is happening and consider what might happen given the market's recent bullish price action.

Indeed, now that the market has consolidated its recent gains and broken out higher, those previously significant resistance levels may now act as support going forward. Additionally, we have now established a secondary uptrend channel (Marked B. in solid blue on the chart) within a primary uptrend channel (Marked A. in light blue on the chart). This all points to a serious test of the 120 level in the not too distant future. As well as being the conjunction of two trend lines (the upper of B and the lower of A) the 120 area is where the 200sma currently sits. Notice the lows of early 2008 are also in this area too.

As far as I can see, its business as usual for the stock market...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Grinding higher and heading into traffic

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



As per my last few posts, the market continues to point higher - the 13 EMA is still very comfortably above the 30SMA suggesting higher prices are still ahead. The conservative adviser in me suggests one ought to be looking to take profits on positions picked up into the 2009 panic lows. The market has completed a 50% retracement of the entire two year bear market (by trading back above 108.755) and has filled in a very rare Gap on the weekly charts at about the same level. The 'easy' part of the dead-cat-bounce' phase of the market is now behind us and one ought to be very careful about having too much money on the long side of the market.

Since we are still in a bullish stance, upside targets ought to be considered going forward. As well as heading into a high traffic area on the chart (between 120 and 130), there are two significant technical targets in that area as well.
1. The bull flag pole formation target is currently at 125
2. The 200 period SMA is at 120

I expect this area (120 to 125) to represent the next major hurdle for the market as we head into 2009 year end. Since the EMA/SMA relationship is still pointing bullishly we have no choice but to keep looking for higher prices ahead. Once this relationship has turned negative we can look for prices to head back down but that seems to be a while down the road yet.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Inverted Head & Shoulders on S&P 500?

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



Considering last week's commentary has changed little over the past five trading sessions, this week's chart on the SPY will look at a common price pattern that every trader (novice or veteran) should be very familiar with, the inverted Head & Shoulders Price Pattern.

As the chart above illustrates, the inverted head & shoulders price pattern is the classic head & shoulders price pattern turned upside down. Here the market sells off in a series of three spikes lower. The second being the most dramatic (head). Should the market rally back above resistance (neckline) there is a high statistical probability the market will carry on an equal distance (from head to neckline) higher. In this case, the market spiked lower to form the 'Head' at 66.31 (in March '09) then rallied back into resistance which formed the 'Neckline' at 99.65 (by June '09). The subsequent breakout through the 100 level suggested that what once was resistance ought to now become support. As well, it suggested that there ought to be a subsequent move back up into the 125 area.

Upside targets have been
1. a 50% retracement of the entire two year bear market move to 108.755 area (refer to previous blogs for more on this calculation).
2. The weekly gap needed to be filled in at 108.

Now that these primary targets have been hit the easy part is over. The classic 'dead-cat-bounce' has played itself out and it is now not a question of 'when' the market will move higher but really 'if' there is much more in the tank.

Since our simple (yet very effective) moving average signal (13EMA vs. 30 SMA) is still quite bullish, we must remain bullish. Should that relationship change we will change our stance appropriately.

With the above in mind, our next (and far more risky targets) are:
1. the 200 period SMA (which currently sits at or near 120).
2. the inverted head and shoulders price pattern target at or near 125.
3. And ultimately, the top of this very steep price channel (refer to last week's chart for the channel) at or near 140.

My hunch is we are in the 7th or 8th inning of this dead-cat-bounce so I shall be reluctant to put on new positions until a correction in earnest occurs. Yes, I will be looking for the market to move higher over the coming weeks but I just don't think its worth the risk...but I'm just conservative that way. :)

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com