Technical Thursdays: Playing to Win

What September giveth October taketh away.

The October takeaway of September’s Fed rate cut inspired gift is right on schedule. FUD (fear, uncertainty, and doubt) has returned and angst is on the rise again. No surprise from this strategist’s perspective.

As noted at the start of both September (see “September Swoon? Not Likely”) and October (Boo!) the commentary on this blog and in my reports forecast a market that would be a net zero by the time Halloween came and went (see prior blog postings). And while only a crazy man would try to be so cute in timing each wiggle and swiggle of a highly dynamic economic and market environment, sometimes conditions line up just right where making such a call is worth the risk. Playing to win trumps playing not to lose.

The fundamental argument for the net zero view centers on the unresolved credit problems that were first considered dealt with when the Fed cut the discount rate as the momentum lemmings put their mountain of capital to work. A little premature and quite a bit simplistic, to say the least.

The unresolved credit derivative’s risk factor is counterbalanced by the positive effects of high degrees of liquidity (aided further by the Fed’s dubious rate cut), very strong balance sheets (corporate and government), and strong global growth, among others that have been noted on this blog and in prior reports time and again.

One technical argument (among others) for a flat September/October time period is illustrated in the above chart on the S&P 500. Applying my long term price action indicator, the moving averages principle*, to the current price action of the S&P 500 it is plain to see that no violation of three elements of the principle – price relative to moving averages, 50 day relative to 200 day, and the slope of both moving averages – has occurred. Therefore, until all three conditions are met, the established trend must be assumed to be the mega trend in force. Which is another way of saying it’s a bull market ‘til it ain’t. And ain’t happens when a major market top is formed, part of which involves the aforementioned moving averages principle.

Investment Strategy Implications

From a technical perspective, the current October correction of September’s rate cut mini euphoria suggests a move to the 200 day moving average, which is right around 1470. Given the strong downward move in MACD, should the S&P 500 reach 1470, it will probably have to trade around that level for a short while thereby repairing the technical damage that all corrections produce before any November/December year end rally can get underway. My estimate is < 2 weeks. Then it’s off to the year end races.

*See prior Technical Thursdays entries for more info on the moving averages principle.

To view a larger version of the charts, click on the image.