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W, More Than Just a Nickname

s&p AnnotatedDouble click the image for a full size view

When I wrote a few days ago that we were waiting for the market to move 5% off its low so that we knew if we had successfully put in a double bottom, I didn’t think we would have an alm ost straight line higher.  However, if you look at the price graph above (the largest of the panels in the image) you can see that we’ve had six positive days with only one slightly down day.

The price graph put in a an almost classic “W” formation with the double bottom acting as the bottom of the W, the two outside lines  are higher than the two inside lines.  The only thing we are missing is the right side of the W being higher than the two middle lines.

The thick red line that is sloping downward is the 50-day moving average.  It is acting as resistance to further movement higher in stock prices.  Note that we ended the day less than one S&P point from the line after moving above it mid-day and closing below it.  My best read on this situation is that we are due for a day or two of selling pressure based upon two of the short-term technical indicators below the price graph.

If you look, you will see a red circle with a green arrow in it; the arrow is pointing to the Relative Strength Index (RSI) and it is nearly over-bought (ie, the market has moved too high too fast).  Right below it, you will see a blue circle with a green arrow point to the other indicator, the Commodity Channel Index (CCI).  It is giving us an over-bought signal as well.  F

However, the intermediate term indicators (see the green arrows that do not have circles around them) all show strength in the current move off the double bottom.  The likelihood is that we will have those couple of days of selling pressure then resume the upward movement in price, rising above the 50-day moving average line and head toward the 200-day moving average line which currently stands at 2060 on the index.

Two of these intermediate term indicators  bother me and show that scenario is not 100% foolproof.  One is the Moving Average Convergence Divergence (MACD) indicator; it is an intermediate term trend indicator and currently shows that we are overbought and that a change in trend is possible (see the green circle with the red arrow).  The other is the On Balance Volume (see the green box) which has stopped at its moving average line.

All of the indicators at the bottom are showing that the intermediate term looks good for stock prices, so these two could just be an aberration.

My plan is to continue to stay with this market until we start moving toward the 2060 level.  Somewhere in the 2025 area I’ll start to book profits on the positions we purchased when the market was lower so that we have cash on hand again if the market heads lower and can’t breach the 2060 level.

If the markets start to fly higher, moving decisively through the 200-day moving average, we will likely continue to hold our cash until we see if the index can break through to a new all-time high in the 2125 area.  If it does, I will be surprised (pleasantly so since we will be making nice money), but there is very little that is text book about today’s markets when the computers are running things on Wall Street and human logic and emotion seem to be sidelined.

Check back here for more updates on the market and how we are managing client portfolios during this volatile time.