News-Based Rally - Nimble Traders Only

George Brooks |

Brooksie's Daily Stock Market blog

Friday, August 5, 2011      9:13 am EDT

DJIA: 11,383.68     S&P 500: 1200.07

Surprise ! Surprise !  Today's "Employment Situation" data for July indicated 117,000 jobs were added to the private sector vs an expected 80,000. The  Unemployment  Rate dropped to 9.1%.

Immediately the U.S. stock Index futures soared, indicating a sharp rebound at the open.

This is good news for those who feared the economy was in a tailspin, but not conclusive, so be careful.

Combined with some stability abroad, today's rally could reach DJIA 11,650 (S&P 500: 1232) by early next week.

However, major resistance begins at DJIA 11,840 (S&P 500: 1250).

A portion of the recent plunge in stock prices can  be attributed to sovereign debt issues abroad. There has been a mad rush to safety. Where can I put my money where it is safe, to hell with a return, I want safety !!!

The question of “what if” is waking people at 3 a.m., and suddenly justification for owning stocks based on historic price/earnings comparisons, dividend yields, market share, growth rates, proprietary formulas, etc. is yielding to fear of seeing a portfolio vanish into thin air in face of a global meltdown.

Enough  big hitters sensed this drop in advance and it showed in the price action of the market averages.

But it appears many didn’t see it coming and “held tough”  before the news of an accord in Congress feeling confident there would be no default. They even bought the news, when this blog was warning a rally would be a fake out.

The severity of the plunge in recent days is related to the rude awakening they got when they realized they were wrong.  It’s kind of like the cartoon where a guy walks off a cliff and keeps walking in thin air,,,…. until he looks down, then whoosh.

 This is different from 2008 in that this is technically oriented, a green-stick fracture bordering on a full scale break. In 2008, you had serious new unprecedented negatives pounding the market every day.

  I expect volatility to increase dramatically as traders launch buying forays into the market after  sharp declines.

Head & Shoulders Top

You’ll read a lot now about what technicians call a “Head & Shoulders” (H&S)  top formation.

If you look at a one-year or longer price chart  of the DJIA or S&P 500, you’ll see they have traced out what looks like a human left shoulder- a head- and a right shoulder.  These are referred to a “distribution” patterns where sellers gradually feed stock out to the unsuspecting public and lesser aggressive institutions.

A “measured move” on the downside for this one is 10,700 (S&P 500 1255).

Those are the levels I targeted months ago before the H&S pattern was fully formed, but  my call was not based on this pattern.

 I use a different technique which  I won’t discuss here. I’ve been charting stocks on a regular  basis for 45 years, so it’s hard to say how much of my work is charts and how much just having been “there” in the trenches every for bear and bull since 1962.   I am a strong advocate of properly used technical analysis, but don’t wear it in my sleeve.

Technical analysis is more important and useful than any other form of analysis. Don’t believe those who say “no one can time the market.”  What they are saying is “they” can’t time the market.

In bull markets, H&S formations  can be ruthless traps for the less experienced technician, luring them in to sell short, only to abort with a surge in the opposite direction as happened April/July 2009 and November 2009/July 2010.

H&S bottoms (accumulation patterns)  also occur, but with the BIG money and hedge fund dynamics, they are now less frequent.  I think you can say the 2007 – 2009 bear market bottomed out with a H&S pattern.

One of the major obstacles to the “buy low – sell high” bromide  is investors are usually too paralyzed  with fear to buy when stocks have taken a huge hit. The BIG money has enough to spread around, so it doesn’t matter to them. Investors with limited funds can’t afford the chance.

One solution is to nibble away. Buy a partial position like 100 shares when you expected to buy 500 shares, then add to it as you become more sure of stability in the market. Add to it when you feel more comfortable, keeping your tolerance for risk ever present in mind.

George Brooks

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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