Another 200 points up and we start taking profits
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    October retail sales were reported down 2.8% versus estimates of a 2.4% decline.
    http://calculatedrisk.blogspot.com/2008/11/retail-sales-collapse-in-october.html

   Other

    protectionism (Free trade is a major positive for world and US economic growth.)
    http://www.washingtonpost.com/wp-dyn/content/article/2008/11/11/AR2008111102283.html?sub=AR

    The current bail out, $3 trillion and climbing:
    http://clusterstock.alleyinsider.com/2008/11/our-3-trillion-bailout

    Up date of credit crisis indicators:
    http://calculatedrisk.blogspot.com/2008/11/credit-crisis-indicators-libor-rises.html

Politics

  Domestic

  International War Against Radical Islam

The Market
    
    Technical

    What a day.  The indices closed within their trading ranges (DJIA 7853--9707; S&P 839--1062); but after a DJIA 900+ point intraday swing, they are already back at the mid point of this range.  In the midst of that volatility, we got another test of the lows of the trading  range.  I noted the likelihood of that in yesterday’s Morning Call and stated further that I’d be a buyer of stocks at the 8100 level.  Unfortunately, I had expected it near the  Market open, so I delayed a scheduled meeting.  When it didn’t happen in the first couple of hours, I assumed that I was wrong, met my scheduled appointment for lunch and by the time I got back, stocks were back to even.  So I shot a couple of blanks in yesterday’s pin action and our Portfolios remain at circa 21% in cash.

    The volatility index also went through a wild gyration and closed much lower.  Most important, volume was the highest that it has been since the 10/10 intra day low was made,   To be sure, a lot of that volume was short covering.  But the key is that when stock prices approached the 10/10 lows, the volume on the buy side was strong enough that it forced the short covering.

To me that means that yesterday was a very legitimate test of the lows of this trading range.  Even more important it gives us a developing pattern for the bottom with three identifiable lows.  For the Averages that would be a (intraday) low on 10/10, a slightly higher low on 10/27 (though the close on 10/27 was lower than the close on 10/10) and then a 11/13 intraday low  roughly equivalent to the 10/10 intraday low, but a close much higher than the 10/27 close.  (For the really technically oriented, if you just focused on the 10/10, the 10/27 and the 11/13 closes, they form an easily identifiable reverse head and shoulders pattern which is bullish.)

    I want to be clear that while I think that stocks’ performance yesterday represented a test of the 10/10 lows, that doesn’t mean that they are off to the races.  The significance is a reinforcing of the 10/10 lows as a bottom; it means nothing with respect to the upside.  I remain convinced that there is still the potential for more bad economic news for a sufficient period of time to keep stock prices in a trading range.  At the moment, DJIA 9707 appears to be the most identifiable resistance level. 

    The immediate point of all this discussion is that if stocks continue to rise toward the upper boundary of their trading range, our Portfolios will use the strength to move out of those stocks that have weak technical patterns versus what I defined above.  In addition, if a stock’s price moves up to or near the levels it traded when the Averages last approached the upper boundaries of their trading range, our Portfolios will sell a portion of that holding with the idea of buying it back as stocks move to the lower end of the current trading range.

    Bottom line: if stocks are in a trading range, yesterday’s action reinforced the 10/10 intraday close as the lower boundary of that range.  If stock prices follow through to the upside, we will get another test of the upper boundary.  In that test, our Portfolios will be selling stocks, raising their cash position back to the 25% level.





Posted 11-14-2008 8:20 AM by Steve Cook