Exposing Ideas to the Envelope of Serendipity

Contact moo at: bluechipbulldog@gmail.com

Friday, October 15, 2010

Bears Fight While the Market Takes Flight

When the rally off the summer lows first got underway, pessimism had reached extreme levels and the prophets of doom were out in droves. We heard about dreaded Hindenburg Omens, Cardinal Climaxes, and in essence the end of civilization as we know it. Richard Russell put out an urgent call to liquidate assets and "batten down the hatches," Elliot Wave gurus warned of a coming crash, and investors were understandably scared to touch stocks. As I said at the time and have continued to point out since, such are the breeding grounds of bull markets. This is particularly true when the stock universe starts to be populated by a multitude of charts putting in sound bases while revealing increasing evidence of buying on weakness, another phenomenon taking place at the time. Be that as it may, the investing public has been mistrustful of each and every new move higher, waiting for the other shoe to drop, while bears have persistently (and painfully) attempted to short the rally they give no credence to. And ironically, it is precisely this fear and skepticism that has served to fuel the rally higher. Meanwhile, charts and market breadth have strengthened with bullish patterns popping up across a wide range of sectors. Those watching the market action closely the past few months were given repeated and clear signals that stocks intended to move higher, and so they have. Perhaps the most important trading lesson I've learned over the years is that as counterintuitive as it may seem, one's opinion of the economy should be kept separate and apart from one's analysis of the market. The market itself will always be your best guide to successful trading: listen to it.

Let's take a look at a weekly chart of the S&P 500 to see how significant the recent advance has been in terms of the longer-term view.

Market breadth has been very solid, as can be seen here in the $NYSI Summation Index.

Many traders have been afraid to trade the market on the long side in recent weeks because of the perception that the market must be overbought, and indeed it has traveled far in a relatively short time period. The McClellan Oscillator, however, shows that on a short-term basis this is not really the case, as alternating corrections in various sectors along the way have served to consolidate recent gains, and the barometer's reading is not far above neutral.

A quick look at Google's after hours move on strong earnings highlights an extremely bullish long-term chart, suggesting considerable upside ahead. Many stocks have now carved out equally bullish long-term bases.

Trade well.

-- Brinkley
blog comments powered by Disqus