Exposing Ideas to the Envelope of Serendipity

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Tuesday, September 7, 2010

So Swings the Pendulum

Futures have been down a little this morning, reportedly on awakened eurozone fears, but also likely due to traders returning to the fold after the holiday and the peak summer vacation weeks in general. After multiple days of price gains last week, the McClellan oscillators are starting to get a little overbought on a short-term basis, so it would not be surprising to see some consolidation or a price pullback at some point this week. However, as stated in the previous post, increasing numbers of charts are turning intermediate-term bullish, and at this point I suspect near-term pullbacks to be viewed as buying opportunities. Of interest is a chart of the IBD 100 Index, the publication's so-called "top 100" stocks based on a combination of earnings strength, technicals, and accumulation. The chart is trading at 52-week highs and breaking out of a bullish ascending triangle pattern, suggesting that considerably higher prices are on the way among these highly-rated stocks.

Many sector charts are also looking considerably stronger, with a double bottom in RTH starting to play out, IYR trading near 52 wk. highs with a bullish formation, and precious metals soaring, to name just a few. The $RUT still has a double bottom base in place and closed above its descending trendline, and the $COMPX is still quite intriguing looking at a very long-term chart, with price continuing to hold above the primary descending trendline on an arithemetic scale. The 2010 low bounced precisely off support at the line.

In addition to a marked improvement in a wide range of charts, is the continued preponderance of very bearish investor sentiment. And yet, when I go to restaurants it's hard to get a table; airports are mobbed; malls in my area, which is admittedly a more resilient growth region, are busy with shoppers lined up at registers, not just passively looking. Finding a parking place is often a challenge. Homes in my neighborhood have started to sell after no sales (other than one foreclosure) in over a year, and friends who just returned from a summer of travel both here and abroad can't stop talking about their surprise at how people were spending quite freely wherever they went. While these things may be anecdotal evidence, the charts are not -- and the point is that pendulums always swing too far in one direction before they start to swing back. My sense is that far too many are expecting a deteriorating or at least stagnating market and economy, and at this point at least, I'm betting the surprise will be to the upside. While there are still some key resistance barriers to overcome, many charts appear to me to be laying the groundwork for a sustained move higher. So for now, I will be viewing any near-term weakness as a buying opportunity.

Trade well.

-- Brinkley
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