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March 16, 2009

Quandary

One of the first adages that traders learn when they make the decision to sacrifice greenbacks to the market gods is that the market will do what it needs to do to fool the most number of people. Technical analysis, if properly used, can help folks hack through some of the emotional noise and tilt probablilities in their favors. But what happens when two very reliable indicators convey contradictory messages?

McClellan Oscillator chart

stock market indicator

As described in the weekend post, whenever the McClellan Oscillator's 10DMA moves back over -55, the market rallies at least until the MCO tags +38. Most of these rallies are multi-week affairs. On the other hand, the put/call ratio's 10DMA is at levels that preceded major declines every time the level was touched during this bear market. Which to trust?

Well, there are two ways this dilemma can be reconciled. The first would be to see a couple more days of solid rallying that quickly spikes the MCO's moving average above +38. This action would likely stretch the put/call reading to a more bullish extreme. We would then roll over into a nasty wave 5-of-5 decline.

The second reconciliation method is one of acceptance: acceptance that the market is switching gears into a bull mode that will last longer than the previous rallies of this bear market. In other words, acceptance that the Secondary Wave of the bear market... a major counter-trend wave... has commenced. Take a look at the put/call ratio from bullish times:

stock market indicator

One would have to expect the Secondary Wave to form the appearance of a bull market in order to keep people riding the bear south, and such foolery should include having the indicators act as if we were in a bull market. How many suckers do you think will be pushing their shorts as the put/call reading sinks to 0.75 or 0.65?

I have to admit that the more I stare at the action, the more I believe the major counter-trend wave is underway. However, I will just be patient and let the charts tell me what to do. The last thing I expect at the moment is an immediate collapse to new lows. Such a move doesn't jive with the indicators, so if it happens, I'm going to miss it. That's just the way it goes. This view does not exclude a quick pull-back (to draw in the bears, of course).

stock index chart

So here's my plan. If the SPX can retreat to 730 and do so in conjunction with some juicy BoW data, I will look to expand my longs by purchasing more commodity-related stocks and/or index futures. On the other hand, if equities continue to surge up to the SPX 805 pivot and do so with some juicy SoS data and/or an MCO reading above +38, I will look to sell index futures.

As you all know, I also anticipate a rally in energy concurrently with the major counter-trend rally. The currently bullish tone of the charts of oil and related equities boost the probabilities that this general rally has arrived or is very close. In fact, I added to my Canroys today via a small position in Pengrowth:

stock chart

Along with the Penn West (PWE) position I acquired three weeks ago, I intend on holding Pengrowth through the commodity bull market.

Before my head falls toward its pillow on it own accord, I'll wrap up with a quick look at gold:

gold chart

It sure would be good news for gold bulls if price held that trend line and turned higher from here. I have no solid opinion on whether or not it will hold. We'll just run the analysis after the fact. In the meantime, I'm just holding my mining positions.

stock chart

It's possible, but not likely, that the minor "c" wave aborted short at $29. It's also possible we're putting in a more complex corrective wave. One month is a rather short correction of a 4-month advance. Again, we'll just have to wait for a clearer picture and trade when the market sets itself up.

 

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