Exposing Ideas to the Envelope of Serendipity

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Wednesday, January 6, 2010

Charts and Commentary for Wednesday

Historically speaking, stock market action in the month of January can hold significant sway over the rest of the year. The correlation is far from perfect, but clues derived from the start to a new year have proved prescient often enough to have many seasoned traders keeping a close watch on the early action. So far, the bulls have retained their relentless control, and the trend remains quite convincingly up. W.H.C. Bassetti, the editor and keeper of the flame of Edwards and Magee's landmark Technical Analysis of Stock Trends, wrote in yesterday's newsletter, "Buy, buy, buy......... all we see are buy signals." While a significant correction has certainly been elusive, all market phases have their own personalities and idiosyncrasies-- and this one has seemed content to conduct its corrective action through sideways consolidation periods. Those still waiting for something more dramatic before getting on board, just might miss the rest of the ride.

Like many others, I sometimes struggle to find the "sense" or justification for the robust rally off the March lows that we've witnessed. But justification, vindication, or validation of one's personal or economic views has little to do with profitable trading. In fact, if you are an active trader, the further you can separate your economic opinion and reasoning from your observations of market action and your trading decisions, the more successful you will almost certainly be. Effective and disciplined risk management is always essential, and I am ever on the lookout for a change in tenor or of trend. At this point, however, there is no technical basis for bearishness, and an abundance of bullish charts still abound. When that changes, there will be plenty of time to reverse course. Waiting for convincing confirmation of any true trend change can save accounts from the considerable damage that can be incurred both by fighting prevailing trends and repeatedly attempting to guess tops and bottoms.

Let's first take a look at the S&P 500, still in its rising channel and on track to the 1,229 initial target I've been eyeing since last spring.

Many sectors are setting up bullish patterns as well, with XLF on the move the past few sessions and one to watch for additional upside.

Market breadth indicators are also still supporting the bull case in here. Here's a look at the ratio-adjusted NYSE Summation Index as it continues to trend higher.

 Trade well.

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