Collapse Of Western Civilization?

You haven’t seen a new post for several days because …. well, there’s just not much new to write about. Sure, if you listen to CNBC or Bloomberg, you’ll hear much about “climbing a wall of worry” or “less than 20% of stock newsletters being bearish while over 50% are bullish [no, they didn't explain what happened to the remaining 30% and, yes, they thought this was a clear contrarian indication of an immanent correction].

We hear from Nuriel Roubini that we’re facing a double-dip recession and from Doug Kass that the market has “likely topped”. Some commentators claim that when more than 85% of stocks are above their 200-day moving average the market is getting into extremely overbought territory, historically, the precursor of either a major correction or a bear market.

Finally, there are the Elliott Wavers led by Prechter who claim that a “Primary Wave 3″ down will soon get underway because “the DJIA has now retraced a Fibonacci 38.2% of the 2007-2009 plunge in stock prices, meeting a minimum threshold for the completion of the Primary Wave 2 rebound”. One Elliottician blogger also believes that

the next wave down will likely entail the collapse of Western Civilization. Given the precipice of history at which the world stands, I’m hurrying to complete my thesis regarding the creative insanity of man. There’s a possibility of global nuclear war by mid-October according to my analysis.

I include all this not because I believe or even understand this gobbledygoock but because I want you to know that I understand your confusion and anxiety. Many of you (those who hadn’t read this blog in 2008 and remained “buy-and-holders” until it was way too late) were badly hurt financially and are afraid of further losses. You just don’t know what to do with your money. As I see it, though, there’s really nothing to do right now.

Remember “This Could Be the Start of Something Bigger and Better” from April 27. Most of the conversation back then was about a suckers’ rally and the market about to fall below the March 9 lows. Fearlessly (or carelessly), I included a spreadsheet of stocks that looked like they had some nice bottom reversal patterns (the chart for CIEN included in that post is interactive and updated to today’s close; CIEN closed on April 27 at 10.83, today’s was 13.32, or 23% higher).

Today feels similar. True, the market is now up more than 50% from the low but remember (and do I need to continue reminding you) how quick and deep the devastation actually was this past September-March. We’re approaching the one year anniversary of the Financial Crash Bear Market’s true beginning on August 28, 2008, when the S&P 500 (^GSPC) closed at 1301; today it’s 1028.

I believe today’s chart actually looks beautiful and all the momentum indicators still point to the recovery continuing:

Here’s what I think are important in this chart:

• Market isn’t out of the woods yet when it comes to that Traders’ Remorse Zone correction. A retreat to the 950-960 level seems reasonable and still expected. If it does retreat, there will again be calls of a head-and-shoulder top or some other reversal pattern, the same as was the case in May-July.
• Three of the 4 moving averages have all turned up and, so long as the Index stays above them, they will soon start crossing over the slow, long-term 300-day moving average.
• Note where the Index was one year ago.
• Note also the continued upward slope to the OBV indicating that volume is higher on days when the market up ticks vs. the days when it closes down.
• Finally and significantly, there’s a positive divergence between the Index and the OBV. OBV is higher today than it was at the beginning of last September while price today is significantly lower.

The reason I continue going back to the market is because my eyes are glued to my trading platform for much of the day. Various daily, minute by minute charts (.SPX and a couple of stocks) are being updated real time, along with the real time value of all stocks in my portfolio and the total value. My second monitor shows the Telechart historical charts of any of up to 6000 charts.

What I know is that everything moves in tandem. I hope that my portfolio will increase a larger percentage than the S&P 500 but, unfortunately on down days, it will also probably decline further. Individual stocks may buck the trend but rarely for very long.

So, having some belief about the market’s immediate direction is critical to knowing what to do with individual stocks (and not losing my nerve or sanity). No one can predict the future but if we have some notion of what to expect from the market over the next few days or weeks, we’ll have more confidence in the decisions we want to or have to make.

The market might bounce around in the traders’ remorse zone but we won’t panic unless it retreats below the neckline of the long-term inverted head-and-shoulder. Likewise, once it clears the upper boundary of that zone, there’s a good chance it will make a mad dash to the next congestion area of 1180-1250.

No one knows which it will be so the suspense builds like a spring being coiled tighter and tighter waiting for a break ….. on the upside we hope.

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