Wednesday, September 1, 2010

Here We Go Again

Another big up day! Yippee! Hooray! Mazel Tov! Burb.

The manic/depressive nature of the trading range market continues as we start the new month. Unfortunately, from a technical analysis perspective, the significance of today's latest bout of stock market euphoria is...nothing. To understand why there's no there there (at least, not yet), take a moment and step away from today's hoopla and look at the accompanying chart.

Since the fall of last year, stocks have been locked in a trading range - one that remains unresolved as to its future major direction. Is it a consolidation range of the bull market to be resolved with an upside break? Or is it a distributional range to be resolved to the downside and, thereby, signaling one of the shortest bull markets in history?

Right now, only the very clairvoyant or foolish know the answer to this question. For the rest of us mere mortals, it does seem advisable to exploit the trading range in a prudent manner (expand and contract equity exposure at each end of the trading range with an 80 to 90% equity exposure at the bottom end and a 40 to 50% exposure at the upper end) and wait for a resolution to then shift the equity exposure to bullish (>90%) or bearish (<40%).

Bottom Line:

1 - Big moves within trading ranges rarely have sustainable meaning for the major trend in stocks.
2 - Eventually a resolution will emerge. Nothing is forever, especially not trading ranges.

Short term, given the weak momentum and MACD starting points, the risk that the Mega Trend is about to turn bearish, and all that lies ahead on the fundamental and geo political realm, today's rally looks like yet another mid range big bounce. Longer term (which is far more important), my bias is toward the distributional range scenario and its eventual downside break. That said and knowing how much this will frustrate many (who insist on certitude in just about everything), stocks can defy logic and gravity for long periods of time. Therefore, staying flexible and not forcing the issue seems the most prudent path to follow.

I may believe in something but when it comes to the social sciences insisting that it must be so is the sure path to poor absolute and relative performance, which is, after all, the name of the game.

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