Saturday, September 08, 2012

The Market-Disciplined Investing Sept 8


This week, the indices (DJIA 13306, S&P 1437) closed within their intermediate term uptrends [12316-17316, 1298-1878]. But as you know, the big technical event was the S&P punching through the upper boundary of its short term trading range (1266-1422) on Thursday followed by similar action in the Dow on Friday [12022-13302]. This activated our time and distance discipline on both; and at Friday’s close, the S&P has been above the 1422 resistance level for two days, the DJIA one day. In the absence of any retracement, the breaks will be confirmed at the close Tuesday/Wednesday.

This leaves me sitting on my hands awaiting confirmation of this potential break but still somewhat doubtful that it will succeed based on continuing negative readings in a number of breadth indicators including the flow of funds, on balance volume and our own internal indicator.

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The Market-Disciplined Investing

Counterpoint: this sentiment indicator is quite bullish (short):

That said, I am clearly at risk of being wrong on the assumption that the 13302, 1422 level would hold. Of course, being wrong is part of the job description. What counts is what you do in response. At those times when stocks are undervalued (as calculated by our Model), a break such as we seem to getting would prompt immediate capitulation on my part; that is, I would be putting cash to work. However in this case, stocks are not only overvalued but accompanied by the still clear and present danger of European ‘tail risk’. This makes it much more difficult to ‘listen to the Market’. In the end there are simply too many technical and fundamental reasons to exercise caution. That or I am just too cowardly to expand our Portfolios’ equity exposure beyond present levels.

Looking ahead, if the breaks of the upper boundaries of the short term trading ranges are confirmed, resistance still exists at (1) the upper boundaries of those very short term uptrends [13760, 1468], (2) the October 2007 highs [14190, 1576], and (3) with the S&P, a more close-in minor resistance level at 1442.

Volume on Friday was up, breadth was mixed. The VIX plunged for the second day in a row, taking it well below the (former) upper boundary of a short term downtrend. In fact, it has declined sufficiently that the distance element of our trading discipline argues strongly for re-establishing the short term downtrend as a primary trend---which I am doing. Furthermore, after this week’s drop in the VIX, it is actually fairly close to the lower boundary of its intermediate term trading range. A successful challenge of this support level would be positive for stocks.

GLD smoked to the upside (again), finishing above the upper boundary of its short term downtrend for the fourth day; thus confirming the negation of that trend. GLD is now in a very short term uptrend and an intermediate term trading range.

Bottom line:

(1) both the DJIA and S&P are challenging the upper boundaries of their respective short term trading ranges [12022-13302, 1266-1422]. A close above 1422 on Tuesday and 13302 on Wednesday will confirm these breaks. Both of the indices remain well within their intermediate term up trends (12280-17780, 1293-1873],

(1) long term, the Averages are in a very long term [78 years] up trend defined by the 4546-15148, 651-2007 and a shorter but still long term [13 years] trading range defined by 7148-14198, 766-1575.

The historical performance of September (short):

The latest from Trader Mike:

Original content All American Investor