I brought my family out to California this week (I'm working -- they're having fun on spring break), where we're staying at my dad's house. My dad is just about the only person around now who regularly gives me constructive criticism on the Morning Briefings.
This morning he told me that I'm in danger of becoming one of those guys who sounds like this: "I think the market is going to go up, but then again, it might go down..."
He was only half-joking, I realize, and I am keenly aware that nobody likes a waffler. But if you base your analysis principally on market sentiment, there just hasn't been that much to work with lately. It's been a very mixed bag.
And in my defense, I did suggest a very nifty way to play the uncertainty with a "stop-and-reverse" position in the SPY that has worked out very well for those who were following along. The stop-and-go-long-point on the short was around SPY $82.20 -- just above the entry price -- and yesterday's close was $86.78.
After yesterday's rally, things are snapping into focus. With the paternal challenge laid down, I'm now ready to roll out a highly specific market forecast.
The market has had a blistering upside run, and it's now confirmed as the initiation of a larger uptrend that should last a few months. But as much as we'd all like the market to just run and run in one direction, that's not the way it works.
The first leg of this uptrend is maxing out. We're due for a pause that should last a day or two, and it should start any minute now. In fact, the move into the close yesterday looked like a point of temporary exhaustion. So beware of any push higher at the open on Tuesday.
The fractal dimension of the 150 minute chart -- a time-frame I've come to rely on -- has reached the point where even the best trends take a rest.
This is strong evidence that the upside in the near-term is limited, and should not be chased just yet. Even if you're dying to get long, it's much more likely you'll get a good chance to get positioned on a pullback over the next few days.
The nature of this pullback is likely to be benign, with a few spurts of downward pressure that never really develop into anything substantial. The most bullish possible retracement would have the S&P 500 (SPX) retracing gently back to the 850 level. But there is definitely room for a move back down to just above 840, which would be a drop of over 20 points from Monday's close.
Yet the headline losses on the Dow over the next few days could look pretty substantial -- even though they really won't be. It's been such a big up move that the Dow could give back 80 or 90 points a day over the next few days -- until the actual war starts -- and it wouldn't do much damage to the bullish case.
Perversely, a nasty looking move back down to SPX 840, Dow 7950 is a very favorable scenario for the bulls. Such a move will breed a sense that the up move was just a short-covering rally with "no legs". This would instill another dose of negative sentiment to help propel the SPX all the way up to a likely target over the next week or 10 days, which is the 40-week moving average, at 908.
So we're likely at the half-way point on this initial leg of the uptrend. It's been a big run -- over 70 SPX points -- but there should still be a lot of points left before any dramatic selling is seen. Once the SPX gets above 900, we'll have to be on the lookout for a more significant pullback, but even that bout of selling should ultimately keep the markets in a bullish overall pattern, setting up another, bigger upside run -- a run that should make a good hard charge at the infamous "neckline" at SPX 950 to 965.
The uptrend should develop along this plan over the next few months, likely all the way into May. It looks to me like we'll have at least a few months of relief from the relentless bear market, and the low that was hit intra-day last Wednesday, at SPX 788, is the nine-month cycle low. These nine-month bottoms invariably produce spectacular rebound rallies, and this time should be no different.
You're probably noticing that I'm not even bringing up the imminent war with Iraq, and how "this forecast is subject to change depending on how the war goes." The truth is there has been little rhyme or reason to the way the market has reacted to the geopolitical news over the past months.
I now think the market has been tracing out its course, regardless of the news flow. The news flow can certainly strengthen and prolong a move in one direction or another, and this effect is impossible to predict.
Yet we have all noticed that often the market's gyrations don't make sense according to what you are hearing in the news. I think we're coming into a time when the collective consciousness of the market's millions of participants will be anticipatory, and what we are hearing in the news will be, at least as far as the market is concerned, "yesterday's news."
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 2% to "59% full" of negative sentiment on Monday.
SHORT-TERM: The hourly gauge remained in neutral despite the surge in price.
MID-TERM: The mid-term gauge progressed from its neutral state by 6% to 44% in its advance phase. The CDI leaped from a -1 to a +3. The first half of the window of opportunity for a market advance was pretty much a bust. The second half now has an opportunity to net a decent advance.
LONG-TERM: The weekly gauge progressed 5% to 58% in its decline phase. However the weekly CDI regressed to 0. With the CDI neutral, the long-term decline phase may be on borrowed time. The weekly gauge is getting ripe for a reversal to the upside.
Actual volatility has now risen notably during the rally off last week's low. That has prevented fear from draining much. There's still a healthy amount of negative sentiment (skepticism) in the market to support further upside for prices. A bit of a retracement of the gains would provide a good long entry point.
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