If you are like 99 percent of market timers, you must be asking yourself or at least wondering: “Are we at a market top?”
I am not going to bore you with all the same reasons why or why not, but instead give you some of my observations that you won’t find anywhere else…
I am a big believer in the ‘history often repeats itself’ mind set. Below are a couple of charts that I like to look at when contemplating macro moves in the market:
This first chart is a 112-year historic view of the DJIA. You will note there are 4 shaded areas on the chart that represent periods of time when the market traded in a relatively narrow range for an extended period of time. These are called, “Consolidation Periods”.
You should also note that we are in one such Consolidation Period now. Below is a blow-up of the current Consolidation Period.
As you can see at the far right, upper corner of the chart, the daily closing price of the DJIA has now moved above the upper resistance level of 14,000. This happened twice in the 19-year Consolidation Period between 1906 and 1925. It happened for several months in the 1937-1950 Consolidation Period. It happened 3 times in the 16-year Consolidation Period between 1966 and 1982. And, it is happening again right now.
Another interesting observation is each time the market broke out of a Consolidation Period for more than a few months, the market went into a strong, multi-year raging bull market. When you look into the future a few years, do you see the continuation of a raging bull market? I might were it not for the unemployment picture, the global economy and government spending that will put a burden of $20 trillion on our country (by some estimates) by the end of 2016.
I could certainly see the current market trend continue for a few months, but my crystal ball doesn’t go out several years. I like to say that I am a long-term investor in the stock market, one week at a time. So my time horizon is only a month or two at the most.
From a macro perspective, I think we are closer to a long-term market top than the beginning of a multi-year or even decade long bull market.
With that in mind, let’s look at the next 90 days of the DJIA… and see what my time-cycle forecasting algorithm shows us:
Time-Cycle Forecast for: DIA – SPDR Dow Jones Industrial Average
As you can see, the trend is only slightly Bearish. In fact, the above forecast only shows a likely movement of less than 2% lower between now and the first of June, 2013. That’s nothing in this market climate. If the market moves along the upper implied volatility line (the dashed line), we could see a move higher in the market of a little over 2 percent. Again… not a big deal one way or the other.
Personally, I am about 90 percent invested at the moment and looking to get 100 percent in the market. However, I also have well-defined exit strategies on each position. I strongly recommend that you use stop limit settings. I set mine once a week based on the implied volatility of the stock for the upcoming 5 trading days. I don’t change the stops unless the calculation produces a higher stop limit price.
I use my Equity Forecaster (available in the Equities.com store) to pick the best date and the best price in the next 90 days to get out of my position. I may, as time moves forward, adjust my upside exit price and timing, depending upon those future forecasts.
By the way… Next week, I hope you will check out my “Free Trade of the Week”. I will be using all my tools and stock-picking prowess to find the best stock or ETF for the market at that time. This is an incredible service and it is absolutely FREE. I am not telling you to buy or sell any equity, but if you want to see my top pick each week, then you cannot afford to pass up this complimentary service.