Monday, May 12, 2008

12,750 Appears Again

Top Line: Another up day on Monday gives the bulls something to crow about but we think it's more opportunity for us to sell. These opportunities will not last too long.

Before we get to the meat of the post, we thought we would remind you of our old friend Dow 12,750. If you take a moment to go to BigCharts via the link to the left, use the symbol INDU and look at a two year period, or start with a six month period. Either way, take a look at the level of 12,750 and notice the way the Dow has flirted with this level over this time period, especially in the last six months. By the way, use your back bottom to come back here when you're finished...ok, please come back, the rest is interesting, too. The point of this exercise is the significance of the 12,750. Ok, back to the Meat...

After reading last night's post, we came to the conclusion that we left a couple of details out and we will try to fill them in over the next few days but tonight we need to reflect on the technical position of the major indexes. The market is in one of those rare positions that gives a good risk reward profile. This situation is the most bearish we have seen in several years.

This is Technical Trading 101 and one of the most fundamental principles there is. The pattern is based on the 200 day moving average. As the 200 day moving average is moving up, it is usually "safe" and profitable to own the underlying asset. Sometimes the asset gets a little too far away from the 200 day average that it is pulling in that direction. At that time exhaustion can set in and the price can cut back through the 200 day line. This action alone can flatten out the 200 day average.

When the 200 day flattens out, the stock normally will try to move back to it. At this time, which is now, the asset will normally move back. Specifically, we should talk about the situation that we find ourselves in, that being the asset price Under the flat 200 day average which had been rising for a while.

The implication this pattern is giving us is one that needs to be heeded. The essential concept is that this will be a failure driven by the owners of the stock that do not want to lose more money. Whether they bought at the October high or at some point other than that, the October high is what they are hoping to achieve again. It's like a Mistake they made, not selling at The top. If Only the stock gets back to its highs I'll sell, they say. What really would happen if the stock topped the old high would be that the owners would now find a new Mistake point.

But, here they find themselves smack dab in the middle of a large failed rally. The flattening of the 200 day line represents the collective opinion of the owners of the stock. When the price falls from that flat line, this will be the point where there will be recognition of a large number of owners that it is now time to get out. More tomorrow...

FSI: 96.10 (pretty strong showing from the Horsemen)

No comments: