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What a rally since my last post mentioned a run to 1k on S&P

Little did I know at the time that the S&P will be getting that close to the 1k mark before my next post.  In my last blog (Market Signs) I said:

“Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.”

Did I have a crystal ball.  No.  The market didn’t get down to the 820 area, but the short positions were quickly stopped out.  Does this mean the bear market is over.  Again, not so fast.  We are going by the 20 month or 80 week moving averages for that one — slightly different numbers, e.g., the 20 month for the S&P is currently at  1104 whereas the 80 week is at 1082, but close enough that you are free to follow a monthly or a weekly trigger.  Obviously the shorter the time frame, the better the precision over a larger sample of trades.

Again we are faced with a scenario where the S&P can pullback in the short term before hitting the 1k target or it can make a run for it first and then correct.  We won’t know which one will occur first, but can keep zooming in with a shorter time frame to get a better trigger and manage trades accordingly.  Since we have yet to hit 1k, the weekly charts haven’t changed, so left the weekly chart out this time.  The daily chart shows Fibonacci support levels for any corrections in the near term, along with a 100 dma or if you are a shorter term trader the 21 dma:

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However, even if we reach 1k or 1100, the odds are very high that the market will retest the March lows at a minimum.  Make sure you have your seatbelts fastened.  By that I mean utilize some sort of timing indicator to keep you in and to get you out before a decline, even if the decline doesn’t materialize and you end up having to get back in again at a higher price — that is the cost of protection.

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July 26, 2009 Posted by | Legacy Funds | , , , | Leave a comment

Market Signs

The market is always giving hints to those that are astute students of history.  What has the market been trying to tell us lately?  The biggest sign has been the correlation of traditionally uncorrelated assets.  There has been an unusually high correlation between global equity market indices and commodities.  Surprisingly this has also included gold.  During the rally from March and the correction over the past few weeks, most asset classes — US equities, international equities, commodities including oil and gold, real estate, and many others — have moved in tandem both on the upside and downside in all time frames.  The moves have been inverse the US dollar.   The charts are currently placing high odds on a correction in these asset classes and a rally in the dollar.  Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.  Sounds like I just let you peek into a crystal ball?  Not so fast.  Although this analysis is based on numerous charts, models, cycles, pattern recognition, number crunching, macroeconomic factors, and the list goes on, a change in certain variables will change sometimes drastically the future roadmap.  That is where risk management comes in place — one plays the mathematical odds but is prepared to quickly cut losses when the variables change.  For example, fibonacci calculations (Fibonacci was a brilliant Italian mathematician) are used to determine the retracement for the S&P in the following weekly chart which shows although we have had a great rally off the low, the S&P hasn’t even retraced 38% of the decline:

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That is where we place odds that even though the S&P is correcting now possibly down to 810, we are likely to rally to 1015 or so afterwards.  We can zoom into a daily chart using the last high and March low to see likelihoods of targets for this pullback, and this is how we get around 810:

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Then we see that if 810 fails, our last line of support is about 780 after which a retest of the lows at a minimum would almost be a given.  Let’s not worry about that for now but manage our trades and risk in accordance to the highest probability set-ups.  Remember this is for informational purposes only and not a recommendation to buy or sell any securities.

July 9, 2009 Posted by | Legacy Funds | , , | 11 Comments