MAILBAG QUESTION:

"I was wondering why you seemed sure that the market would continue to go up ahead of when there was solution to the fiscal impasse? How do you calculate a next big target assuming stocks keep moving higher?

MY RESPONSE:

There was an initial substantial rebound after major indexes like the S&P retraced about 2/3rds of its prior major advance that was also ACCOMPANIED by an oversold extreme in the Relative Strength Index (RSI) along with what I consider to be an extreme of bearish Trader sentiment. Those conditions set the stage for a first up leg. From intraday low to intraday high (before a sideways correction set in) the S&P 500 (SPX) rebound carried 80 points and in the Nasdaq Composite (COMP) the initial rebound took COMP 220 points higher.

After these initial advances, there was a sideways move where the reaction lows didn't give back much from the highest high of the first up leg. You can see this on my SPX and COMP daily charts.

The pattern of a relatively shallow sideways correction, which creates kind of 'box' like pattern, followed by another upside move, is a classic bullish pattern. One that suggests that a second up leg could, at a 'minimum', equal the point gain of the first advance.

One common method for doing a projection or calculation for a second up leg is involved in a so-called measured move objective. It's also true of course that the recent rally stopped at prior highs: in the 1428 area in SPX and in the 3036 area in COMP. Still, the overall pattern looks like a second leg in the major stock indexes will go beyond these initial resistances.

Now, as to how I could have the boldness to think I know ahead of time that the Washington impasse will be settled in the favor of some sane solution that will keep the economy on its modest recovery track is a philosophical one I could say.

I came to realize early on in trading that chart patterns in the major indexes tend to PREDICT or foretell how things will work out in terms of the economics of a given situation. Buying and selling pressures tend to be the best guess as we go along for how unrealized events will pan out. This pattern is true more often than not and I have seen it play out over a number of market cycles.

Fortunately for me, the longer I've been an observer of all kinds of markets and market cycles, the more it seems to pay off in terms of forecasting moves. Not that anyone is right all the time but you don't have to be to make money year over year. Wait for trade entry ONLY during very oversold or very overbought conditions and being right 4 out of 6 times in those occasional instances (assuming use of exiting stops for the losers) can lead to a quite profitable year. But, I digress!

Moving on the Nasdaq Composite chart seen next, I've highlighted a possible future 'measured move' objective in the same manner as seen above with the S&P. There was a set back today of course, but I'm currently not expecting a sharp further decline to below the recent cluster of lows in COMP; or to below 1400 in SPX. Stay tuned on how this works out of course but if it works the way I suggest you heard it here first perhaps. Or, you end up realizing that my analysis was off the mark. The Market will speak on this question! Always true and Market outcomes judge the truth of such concepts.


GOOD TRADING SUCCESS!