A Strategy for the Market's Next Rally

Feb 12 2014, 11:43am CST | by

The action over the past week has certainly caused many of the prominent market bears to run for cover and Tuesday’s action added to their pain. Better-than-expected trade data overnight from China has pushed the European markets even higher in early trading on Wednesday.

Some of the bears have already thrown in the towel, but as I mentioned in January in Souring Sentiment Will Help Stocks, a higher level of bearishness is good for stocks. There has been broad improvement in the technical outlook, which indicates that the market is likely to move to new highs this quarter. The evidence comes from a wide range of indicators including another reversal in the Volatility Index (VIX), which was also seen at the October and June lows.

Click to Enlarge/>

With over 70% of the S&P 500 stocks above their 50-day MAs at the end of 2013, the market was in the high-risk buying zone. This has changed dramatically over the past six weeks as the five-day MA dropped below 35 last week and has now turned higher. The recent low was below the lows seen in June and October.

Last week’s panic selling was more severe than I was expecting but the spike in bearish sentiment, I thought, was a positive for investors. When the market is under the influence of either panic selling or a buying stampede, it is the worst time to react emotionally.

The current market environment does not favor chasing prices or aggressive buying at current levels in the market averages. A review of the key market averages and indicators illustrates why a patient buying approach should be best.

Click to Enlarge/>

Chart Analysis: The daily chart of the NYSE Composite shows that it closed at the daily starc+ band and back above the quarterly pivot at 10,082.

  • There is next resistance at 10,227 (line a) and then the monthly projected pivot resistance at 10,276.
  • Once above the late-2013 high of 10,406, the weekly starc+ band is at 10,549.
  • There is initial support now at 10,040-10,068, which corresponds to the 20-week and 20-day EMAs.
  • There is an additional band of support in the 9900-9975 area.
  • The McClellan oscillator did not get to extreme oversold levels on the market decline as it had a low of -178.
  • The oscillator closed last week above the zero line and has now broken its downtrend, line c.
  • The Arms Index or TRIN did reach oversold extremes as it closed at 3.42 on Monday, February 3.
  • The longer-term chart of the NYSE Advance/Decline shows that it broke through resistance at line d in January.
  • This, and the new high in the weekly NYSE A/D line, were key reasons why I thought a correction would be well supported.
  • The A/D line did hold above support (line e) and is now close to making new highs as it is stronger than prices.

Click to Enlarge/>

The Spyder Trust (SPY) dropped below the 38.2% Fibonacci retracement support at $174.44 as the low last week was $173.71.

  • On Tuesday, the daily starc+ band was tested with further resistance at $182.50 to $183.12, which is the monthly projected pivot resistance.
  • The 20-day EMA at $179.62 represents first support with further in the $177.50 to $178.50 area.
  • The daily OBV broke its uptrend, line b, on the decline and has just moved back above its WMA.
  • It is acting weaker than prices as it is still well below the resistance from November and January.
  • The weekly OBV (not shown) has moved back above its WMA.
  • The S&P 500 A/D line did make new highs in January, which confirmed the price action.
  • The A/D line is rising sharply and is close to the prior highs, line c.

The daily chart of the PowerShares QQQ Trust (QQQ) shows the dramatic reversal from last Wednesday’s doji low.

  • The QQQ is already up over 6% from the doji lows and an HCD was triggered on Thursday.
  • The close Tuesday was at the daily starc+ band and also very close to the prior highs.
  • The monthly projected resistance is at $90.92 with the weekly starc+ band at $91.72.
  • There is initial support now at $87.50 with the 20-day EMA at $86.68.
  • There is further support in the $85.50 area and then last Wednesday’s low of $83.74.
  • The daily OBV has just moved back above its WMA and is still below the resistance at line f.
  • The weekly OBV (not shown) has turned up from its rising WMA.
  • The Nasdaq 100 A/D line has been very strong since it tested the support at line h.
  • The break through the resistance at line g confirms that the correction is over.
  • The A/D line could drop back to its WMA on a pullback.

What It Means: There were plenty of stocks that have moved impressively higher in the past few days with technology, healthcare, and utilities showing the best relative performance. The biotech sector was also very strong on Wednesday. The ability of the SPY and QQQ to hold above their quarterly pivots on the correction was a positive sign.

Both the SPDR Dow Industrials (DIA) and iShares Russell 2000 (IWM) are currently lagging, and I would avoid them for now.

There should be a meaningful pullback in the next week or so that will create a better risk-buying opportunity in the market-tracking ETFs. Therefore, a patient approach is recommended, but it will require that you have resting orders in the market. Positions in both Europe and Japan will also be favored on a pullback.

How to Profit: For the Spyder Trust (SPY), go 50% long at $178.34 and 50% at $176.56, with a stop at $171.57 (risk of approx. 3.3%).

For the PowerShares QQQ Trust (QQQ), go 50% long at $87.24 and 50% at $86.32, with a stop at $82.18 (risk of approx. 5.3%).

Source: Forbes Business


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

Bhopal fugitive Warren Anderson is dead (Roundup, Changing dateline)
Washington, Oct 31 (IANS) Warren Anderson, the former CEO of Union Carbide Corp, has died at 92 after living for 30 years under the shadow of the 1984 Bhopal gas tragedy that killed thousands.
Sit-ins delayed building powerhouses: Nawaz Sharif
Islamabad, Oct 31 (IANS) Prime Minister Nawaz Sharif Friday blamed sit-ins for delaying the construction of powerhouses in the country, as cricketer-turned-politician Imran Khan continued protesting with supporters in the capital city for over two months.
Britain to repay part of First World War debt
London, Oct 31 (IANS) British Chancellor of the Exchequer George Osborne Friday announced that the British government will pay off part of the country's First World War debt as part of the redemption of bonds stretching as far back as the 18th century.
UN-Habitat presents the first World Cities Day
Shanghai, Oct 31 (IANS/EFE) The UN Human Settlements Programme (UN-Habitat), headed by former Barcelona mayor Joan Clos, Friday launched its first World Cities Day in China, to be held every Oct 31 to promote sustainable development.

Latest from the Network

Ponzy schemer cheats residents of $22 mn, gets 15-year jail
Washington, Oct 31 (IANS) If you have been one of those approached by some 'known' person for investing in something with an assurance of 'easy money', you may benefit reading about this Ponzi schemer jailed in the US...
Read more on Politics Balla
Burkina Faso's president quits, army chief takes power (Roundup)
Ouagadougou, Oct 31 (IANS) Burkina Faso's army chief Gen. Nabere Honore Traore assumed power Friday after President Blaise Compaore announced his resignation following violent protests against his attempt to extend...
Read more on Politics Balla
Spanish government challenges Catalonia's symbolic vote on independence
Madrid, Oct 31 (IANS/EFE) Spain's government Friday challenged Catalonia's decision to hold a symbolic vote Nov 9 as an alternative to a referendum on independence stalled by the Constitutional Court. The government...
Read more on Politics Balla
Myanmar roundtable summit discusses political issues
Nay Pyi Taw, Oct 31 (IANS) Myanmar's first five-party roundtable summit held in the Presidential Palace here Friday discussed some key political issues in the country, presidential spokesman U Ye Htut said at a press...
Read more on Politics Balla
Jake Gyllenhaal saves outrageous clothes for Halloween
Jake Gyllenhaal always wears his ''sl***iest outfit'' every Halloween. The 33-year-old actor has revealed his dad, director Stephen Gyllenhaal, is ''obsessed'' with Halloween and throughout his childhood Jake and his...
Read more on Celebrity Balla
Katie Holmes would tell her younger self to 'relax'
Katie Holmes would tell her younger self to ''relax''. The 35-year-old actress, who has eight-year-old daughter Suri with ex-husband Tom Cruise, claims she never believed she could carve out a career in Hollywood while...
Read more on Celebrity Balla
Joshua Jackson calls Diane Kruger his wife
Joshua Jackson calls Diane Kruger his wife. The 'Affair' star, who previously admitted he and his German girlfriend of eight years are unlikely to ever marry, doesn't like referring to the blonde beauty as his...
Read more on Celebrity Balla
Paris Hilton dresses up as her dog for Halloween
Paris Hilton dressed up as her Pomeranian pooch for her Halloween party last night (30.10.14). The 33-year-old star sported a fluffy white minidress and matching headgear, which looked like the fur of her $13,000 puppy...
Read more on Celebrity Balla
Saudi Arabia facing high child sex abuse: Studies
Riyadh, Oct 31 (IANS) Some studies in Saudi Arabia have revealed that the rate of children's sexual abuse in the Kingdom is alarmingly high with every fourth child having been exposed to sexual harassment at some point...
Read more on Celebrity Balla
30 killed in Nigeria car bomb attack
Nairobi, Oct 31 (EFE) At least 30 people were killed Friday when a car bomb exploded in a crowded bus station in the northeastern Nigerian state of Gombe, the National Emergency Management Agency (NEMA) told media....
Read more on Politics Balla