Feb

Investing Systems Research Lab Blog for Week of February 20th, 2012

“Inertia – [in-ur-shuh] – the property of matter by which it retains its state of rest or its velocity along a straight line so long as it is not acted upon by an external force.”

This market has inertia…

We know market never really moves in a straight line, but this tight “inner-channel” we’ve been watching since late December /early January is practically a straight line when viewed in larger context.

It just looks so orderly zoomed-in on 60-minute timeframe.

Notice the light green horizontal line. That goes all the way back to the “sell in May and go away” 2011 high in the SPX.

Doesn’t it seem like the current “inertia” makes it a viable target next week?

Maybe even Monday or Tuesday?

Technically speaking, this market “environment” is practically Nirvana. The S&P is above all the key moving averages on the daily chart (20-50-200).

It is in a comparatively tight range, moving up at at an angle that doesn’t appear to be parabolic.

By the way, please excuse my recent/prior “caution” regarding the sustainability of this “cycle-up”. Over the years I have been conditioned to expect pullbacks and corrections in the market when one is least expecting it. Moves like you see on the chart above are somewhat uncommon, but not unprecedented.

It really reminds me most of the QE2 move from September 2010 to February 2011.

Below is the daily chart that shows the “run” I’m talking about. Notice in the middle, we had a “pullback”. I also drew a symmetrical rectangle beginning the same day as the “narrow channel” above began, December 20th.

As you recall, that was the same time the SPX moved above the 20 and 50 day moving averages and the same spot the 17 crossed the 43 on the 60-minute.

Imagine the absurdity of the current pattern manifesting practically symmetrically to the last one. They call this an “analog”, but most technicians agree that they are only interesting to a point.

Assumptions based on analogs typically “decouple” at some point because of the “acted upon by an external force” nature of inertia.

In other words, I am temporarily inclined to go with the current inertia of this market as long as we stay within the inner rising-channel.

You have always known me to be skeptical, somewhat cautious and never complacent when it comes to the overall market. However you know in real-life I go with the flow. I don’t fight the tape or the FED or the “elusive reason” the market is rising. I’m in there trading every day and looking for stocks I think can go up.

While in the near-term I would welcome a pullback, a correction or some type of shake-out”, the apparent inertia of this market over a longer time-frame does not rule out a move back to the highs.

Take a look at the monthly chart of the SPY.

You see the horizontal “resistance zone” I drew last week on the daily?

Well, if and when we break through that, any temporary pullback aside, it looks like a move to the all-time high is not out of the question. In an election year? hmm…

Notice at the bottom of that chart I drew a bullish upward-sloping trendline on the Monthly stochastics.

So we went from a 60-minute chart to the daily and the Monthly and it looks like “all systems are go”.

However “be prepared” for the inevitable, perhaps temporary, correction. Just like the one mid-way through the move in 2010 in the small green square on the daily chart above.

That can come at any time, but most traders seem to think it’s smooth sailing till mid-March.

It’s going to take more than a pullback or even correction to reverse the current inertia. A “change in trend” develops over a longer period time and we should be well ahead of the curve when that occurs.

I know I jump around a lot regarding timeframes, so if I was going to summarize what I see, technically:

TIMEFRAME:

short-term – bullish as long as the SPX stays within the tight inner-channel. The market is above the 20-50-200 day moving averages. We could still have some “down days” but stay in that channel.

medium-term – bullish as long as the market stays in the larger rising channel. The market is above the 10-week and 30-week moving averages.

long-term – bullish as long as the market stays above the 10-Month moving average on the monthly chart. Our long-term market timing indicator is “in” the market.

In the very short-term, meaning the next two weeks, I think the market might have to do some “battle” in the range of those 2011 highs. And of course there is the ever-present “news/external force” that we know can affect what transpires.

But as long as the environment is clearly “favorable”, we might as well use it to our benefit.

Actually, that’s pretty much what I do all the time these days…

Someday the market will start to act “weird” and we will see sell-offs in late trading. The reaction to news will start to be less favorable. We will see distribution days and down days on volume Those will be some of the clues of a potential change in trend. It should become fairly apparent when the behavior changes, so for now let’s trade what we see on the charts and go with what the indicators show.

To make up for last week, when I didn’t post any new trade setups here, I have quite a selection this time around.

A contrary indicator? Perhaps, but I see some stocks with interesting patterns out there.

Once again, I decided to bring them to you on the 60-minute timeframe. This makes it fun because it requires you to bring up the daily charts of these stocks to see the proper perspective. It is imperative you look at the dailies and know the earnings dates of these stocks before you decide if you like any of these setups.

I suggest you add these stocks to a watchlist, look through the daily charts and select the ones you favor and can follow closely.

There’s a couple of these I like better than the rest that will likely show up as Trade Plans this week.

I hope you have/had a great President’s Day Weekend. I honestly enjoy every 3-day weekend as it allows me to catch up on my 3 R’s, reading, rest and relaxation.

We will be doing a live broadcast Tuesday morning at the market open and I hope you will join us.

We sincerely appreciate your support and participation on the shows. As you know, we “live, eat and breathe” the market. It’s always fun and educational to have a like-minded group and that’s exactly what we have, thanks to you – our members.

See you Tuesday!