Bet you thought it would never happen - Fundamentals Guy writes something bullish, that is. Yep! Don't get me wrong. I'm still building a financial ark. But there's nothing like a little sunshine between fierce storms. So what's it all about?
For starters, recall the major differences between secular and cyclical markets. If that sounds like a foreign concept, be sure to check out Mark Phillips excellent article on the subject from July 17th. Find it here:
The point in bringing this up is to recognize that cyclical markets occur within secular markets. Clearly the markets have been bearish for nearly 2.5 years, the COMPX has lost 74% of its value; the S&P 500 has lost 42%; the Dow has lost a "mere" 26%. But for overall performance of the broad market, note that the Russell 2000 has lost 37% in value to date since its highs. That qualifies as a bear market in my book. Still, chants of buying for the long haul - buy and hold - persist. After all, it has to get better from here (little voice whispers, "Doesn't it?").
Reminds me of the Black Knight in Monty Python's "Holy Grail", who lost his arms and legs in a sword fight. Ever the optimist, the Knight proclaims, "It's just a flesh wound. Let's call it a draw." Investors shrug off the market losses with equal denial. Anyway, that's the secular part - Big Bear.
But this week, we've seen the emergence of a baby bull with a sharp selloff on Monday followed three days of triple-digit gains, which is a tip of the hand to investor euphoria being alive and well. But it does not mean that stocks are fairly priced for their current or future returns. Most readers know where I stand on that - I think equities were overpriced, even on Monday, and are even more so now following the rally. Even so, bullish rallies that last longer than a day can find a good home within the Bear's lair as long as they don't overstay the welcome. Note, however, that this is not the resumption of the bull market of yesteryear, though it will trick many into believing so.
In effect, what we can boil it down to is a cyclical bull within a secular bear market - a day of sunshine between storms. Am I moping and complaining because the sun is out, which makes me look like a darn fool for ark building? No way. I'll enjoy the sunshine because I can! In real terms, as a market agnostic, I don't pray for 40 days and 40 night of rain to justify my ark- building. Nor do I pray for sunshine just to avoid the task of building an ark (even if the rest of the world thinks I'm nuts). I just read the weather reports and decide how to spend my time. To me, this is winter and we've been given a sunny day. I'll behave accordingly.
So where does that lead me? To the charts of course! Here's a potentially profitable play that I think could be setting up. The play can be made on any of the major indexes, though I'm going to favor the S&P or the Dow. The NASDAQ is still, well, the NASDAQ, and does not have the potential, in my opinion, to spring upward as convincingly as the other two. Technology is still out of favor despite the recent rally.
This is what I see as potentially happening that would get me bullish for a few moments in time. But first - let's see - eeny meeny miney mo - the Dow chart (INDU) on a weekly daily and 60 min time scale:
Dow Industrial chart -INDU (weekly/daily/60):
Looking at the current situation, the weekly chart has regained some composure. I particularly like the 5-period stochastic bursting out of oversold on a very nice launch trajectory. Even the 10-period has managed to move itself upward, though fractionally, out of oversold. That's pretty positive for the cyclical trend. But new highs? "To Infinity and Beyond!" to quote my cousin, Buzz Lightyear? Not yet.
But the daily (center) chart is looking good too. I particularly like the higher low on the ascending support line along with the 5 period stochastic, which is no longer a wishy-washy line. It is moving with definite purpose. But note the pending resistance just above current level. I don't want to get too cocky and buy the breakout. This is after all, a bear market. Even if we get the breakout, the 50-dma of 8991 could turn the oscillator south before it ever hits overbought. And overbought is where I want to see the oscillator move once I get into the bullish play.
Now look at the 60-min section of the chart (right side) for more detail. We see the same line of resistance just above current levels and a very overbought oscillator. Careful, it can still say pegged up there for while as the candles break out, but I consider that unlikely. Why unlikely? Today's continuation of the 9-candle rally has moved far off its ascending low trendline and very close to resistance. Maintaining that rate of incline in sustained fashion is next to impossible, much like cheering for your favorite sports team for 9 straight hours. You may want the "win", but expressing it with unbridled enthusiasm creates a stamina problem. Just think how 9 hours affects the athletes. And in this trading game, we are the athletes!
That's where we are now from what I see on the trading charts. Now let's see where we might be headed and how to potentially profit from that.
Extrapolated Dow Industrial chart -INDU (weekly/daily/60):
Here's what could potentially happen that I'd like to be part of. The goal I am aiming for, starting with the daily chart if the stars line up, is to have the candles break above resistance at roughly 8725-8750 with a move all the way to the 50-dma of 8991. It likely will not happen in a straight line. That is reflected in the daily chart. So long as the red candle on the daily chart that expect tomorrow or Monday does not engulf today's green candle, I won't worry about that. It will be within tolerable limits.
However, my thinking is that after three days of rally leading into tomorrow (Friday), some profits from the 600+ point week are likely to come off the table, especially in front of retail sales figures to be released 5 hours prior to the commencement of a Fed meeting next Tuesday. So how do we get from here to there?
Look at the 60-min chart. I personally will not be jumping on the bulls' bandwagon first thing tomorrow. Instead, I'd wait for some of that selling to set in such that the 60-min stochastic cycles down to oversold and the candles cycle down to the 8500 level, give or take 50 points. If that support line can roughly hold above previous lows on the same ascending trend and the stochastic cycles to oversold and then reverses back up over the 20% line, call it an entry (timed with shorter time frames of course). That would be the second higher low and would confirm a more bullish trend that we've not seen since May - a signal that it could actually have some legs that might last weeks, even months, but not forever.
Ideally? It clears the 50-dma on the way back up. Thus, bull confirmed. Wouldn't that be great? Given the trend that appears to be emerging, I'll be thinking twice before playing puts on the way down, though for trading, taking a quick bearish swing might be an acceptable risk tomorrow or Monday. Otherwise, the general rule is to not buck the bigger trend, which on the daily chart is bullish.
So baby bull wants to taunt the big bear? I say watch for claws and teeth and enjoy the romp in the pasture!