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The Trend is Your Friend

S&P 500 Annotated

I wanted to give you an update on the graph we are watching to see how the upward trend channel is fairing after the turbulence at the end of last week.

You can see that the the market action is still trending upward within the green channel lines I’ve drawn. The pink line at the bottom still denotes what I believe to be the low for the year, with the double bottom clearly visible on that line.

Nothing new from a technical standpoint to discuss. We are sticking with the trend

However, I thought it might be instructive to look at a pattern that we’ve seen in the past that we seem to be following with this current market.

Below is a chart of the 1987 stock market crash:

1987 Stock Market Crash

You can see that I’ve drawn a box around the choppy action in the market as a bottom was formed, tested and then the subsequent move higher in coming years.

Below is a chart of the current market formatted in the same manner:

2011 Market Action

You can see that the post-drop movement in the market looks remarkably similar. The only thing we are missing is the several-year move higher from the lows.

To me, the question is whether we will see that sort of move higher as we are recovering or will a new pattern develop that represents the realities of 2011 and beyond.

There were lots of economic issues in 1987 on both the good and bad sides of the tally, much like today. It seems to me that there are more on the bad side of the tally today but maybe that is because I am living through these as a market-weary 50-year-old but in 1987 I was an idealistic twenty-something just finished with my Masters program and putting my thesis into practice, so everything looked like an opportunity.

In any event, we are taking the 50-year-old’s cautious view and keeping a near-term target for the market through year-end as denoted by the pink box on the graph at the top. There will be resistance to overcome in the form of the blue Fibonacci retracement levels and the falling 50-day moving average, but we will cross those bridges when the come. But, our plan continues to be to raise cash when we approach that pink box [ maybe before, depending upon how we deal with the overhead resistance ] and then make an assessment on whether 2012 will give us a recession or not.

At this point the typical signs of an impending recession just are not there, so we are sticking with the market in the belief that earnings season will provide some positive catalyst for the market to move higher, through resistance and find a home in the area of our target.


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Mark