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Market Timing

Saturday, June 07 2014

After six failed attempts in a three-month sideways trading pattern, the market (the SPY) finally broke out to the upside from inside a "No Man's Land".  And, what a breakout it has been!  In the graph below, you can now see a new, powerful up-trend (green line).

It seems that this breakout has, so far, followed the tradition for sideways/flat patterns, that is:
1) markets usually breakout of a sideways pattern in the same way that they entered (i.e., if the market was moving up prior to the sideways pattern, it will usually break out to the upside and vice versa), and

2) the length of time that the market will follow the resulting move and the size of the resulting gains/losses is closely correlated to the amount of time that the market traded in the tight pattern.

My opinion on the reason for #2 above is that after a long battle, the losers (in this case, the bears) quit trading and go away for a long time.  I also believe that this is how the market (like now) can make sizeable, sustainable gains on relatively low volume (little or no competition).

It seems that the most likely direction of the market from here is up.  But, even though it could, this does NOT mean that the market will follow the green-line trendline in the graph below going forward.  It's just as likely that the SPY could drop back some or go sideways until it hits the long-term trendline (black line in graph below), and then follow that trend up going forward.  That would be like a "reversion to the trendline".  Either way, we make money.

Also, do not rule out a correction after these healthy gains. It is not what I expect, but MIPS does not pay one bit of attention to my expectations. If the market does somehow unexpectedly drop from here, MIPS will get us out.


<<< Previous Blog >>>

For some time, we have been talking about this war between the Bulls and Bears, but we never really defined it. We call it a war, because that is what it is like.

To help explain this, let's refer to the "Battleground" map below, with the following "definitions".
1) The SPY numbers ($188/share) are kind of like "mile markers".
2) The main battlefield is the purple area between markers 184 and 188.
3) The first wall of resistance in the battle is at 188 and the absolute "stone wall resistance" is at 189.
4) Between 188-189 lies an area that we call No Man's Land, that is deadly to try to cross or occupy.
It is like the Normandy Beach in WWII, the Shenandoah River in the Civil War, or a "moat" in the
Middle Ages. The casualties in this "zone" are almost unbearable, but sometimes attackers manage
to cross it. (Like now?)

So, using the above definitions, the History of the Battle of No Man's Land is:
1) Let's say the green bars are attacks by the Bulls and the red bars are retreats.
2) The Bulls attacked the Bear's first resistance level at 188 in the first week of March 2014 and then
pushed through No Man's land to 189 before getting stopped, routed on 3/13/14 and pushed back
to about 183.5 by mid-March.
3) Then there were 5 more broad attacks during the battle (orange ellipses).
4) The Bulls camped at the 188 level or hunkered down in No Man's Land for 26 days/nights in this
2-1/2 month battle.
5) The Bulls hit or broke over the wall at 189 nine times in this battle and failed every time, except on
its ninth try (today), where it stopped at 189.8.
6) One major problem is that the breach today above 189 came on low volume (kind of like the Bear's
super troops were not in this battle).
7) Now it is up to the Bulls to "hold their ground" and/or capture more territory, while the Bears must
concentrate on re-claiming the territory that it lost today.

The Bulls should not celebrate until the market moves higher or at least they retain what they have gained so far.

Our MIPS Market Strength Indicator is strong to the upside now, but we all know that this can change quickly.
- see 2nd graph below.

Remember, MIPS may see this somewhat differently, so let's wait for MIPS' signals.

Battleground Map

Posted by: Dr. G. Paul Distefano AT 11:28 pm   |  Permalink   |  Email

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