Wednesday, 26 October 2011


How ONTHEMONEY called the essential turning points, 
in posts and tweets, since our latest crisis began

On October 4th, as stock markets across the world appeared headed for the abyss, as headline writers were dipping their quills deep in red ink and investors were pricing in a Greek vision of financial armaggeddon, I begat a tweet:  

What with me being a brand new bird in the tree, no more than a twigful of investors can possibly have read it. Those lucky twits. From that day's low to this Monday's high, buyers catapulted the benchmark US  S&P500 higher by more than 14%.

As you know, loyal reader, I very rarely blow my own trumpet in these pages but, just this once, I'm going to make an exception.  

A month ago I explained how, based on a slew of technical and sentiment indicators (and inspired by Bob Farrell's rule no. 9, see link), I was looking for a market reversal to kick in for which very few would be prepared.

Chart posted on September 26th
Precedents suggested a strong move higher was probable and that the risk was at that point far outweighed by the potential reward.  I suggested that 1250 on the S&P500 was set to prove a major stumbling block on the upside, while a sustained break below 1100 would be my line in the sand to sell.  Prices dipped below the line for precisely a day and a half before taking off on a face-ripping rally.  My 1250 target has been reached in the blink of an eye and shorter term traders have started to take their profits.  So what happens next?


We all know the political and economic reasons to be gloomy here.  But technically speaking, the key to the future of the world's stock markets lies in the minds of the millions of investors who bought after New Year and before August 3rd - the last time the S&P500 flew above 1250.  And I'm not talking just about this year.  That level has been a key turning point for stocks many, many times - right back to 1998. 

Major support and resistance, S&P500 1998-2011.

The top line in grey is 1250, fulcrum point for tops and bottoms in 1998, 1999,
2001, 2005, 2006 and several times in 2008.  Above it lurk clouds of potential sellers.

The large head-and-shoulders formation I described in a previous post, looming above the 1250 level, will act as a heavy cap on progress from this point on.  Any investors who bought at these lofty levels are trapped in a cloud of death.  If they begin to fear another downdraft, they'll quickly start offloading their holdings in the hope of getting out near break-even.  Potential catalysts for such a sell-off aren't hard to find: from renewed convulsions in Europe to more emerging evidence of a US recession or accelerated slowing in China.

The probability that none of these potential storms will hit is, in my view, miniscule - though they may well take a while to brew.  Until then, stocks are most likely to chop sideways for a while, as did the many bear market rallies of 2001, 2002 and 2008 following their initial explosive moves higher.  

Right now I see no compelling edge either way and, aside from taking very short term trades, I am inclined to stand aside.  But before long I suspect that, with prices only modestly higher, bullish fervour could take hold and push my key technical indicators to extremes.  At that point you can bet I'll be back in these pages detailing the next great selling opportunity. 

Or perhaps a sudden downdraft will hit over the next few days and push those same measures back down into the zone of fear, in which case I'll return suggesting we again fill our boots with stocks in preparation for another snap-back rally.  

You know, part of me longs for the comforting investment certainties of the 1990s, or the pipe-and-slippers market of the 1950s.  I'd so much rather invest for the long term and forget about day-to-day and week-by-week gyrations (it's still possible - see here!)  

But this is the rare, nervy and unsettled investing atmosphere in which we are forced to operate, dear reader - a time for short term traders to bank coin, and for die-hard buy-and-hold investors to tear hair.  

Whether by post or by tweet, stay with On the Money, bank your coin, and keep your hair.