Plan Your Trades; Trade Your Plan

SPX – 1095.63

DJIA – 10,344

December 1, 2009

“The principals of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes they have made in the past.”

-Edwin Lefevre

Plan Your Trades; Trade Your Plan

Friday’s post-holiday credit shake and 90%-down day notwithstanding, there appears to be little selling in most stocks, action that bodes well for higher prices. Near-term, the S&P 500 (SPX) is trading in a narrow range over the past three weeks.

A close above the November 16 recovery high likely leads to a price spike into resistance. Note in the SPX monthly chart how prices in November reversed a fade in October and how a close above the November 16 high would penetrate a declining trendline connecting the all-time October 2007 high and May 2008 rally high.

Possible resistance levels are 1121.44 (50% bear market retracement), 1136.35 (75% of the 1974-2007 range), 1144.78 (62% retracement of the May 2008-March 2009 bear market leg), and 1134.19 (an average of all time).

A SPX close below 1082.50 would indicate an intermediate-term correction is likely underway. If all three key indices in the Market Trend Indicator (MTI) were to close below their respective18% weekly exponential averages, it would confirm that action.

Fundamentally, Dubai World requested a six month moratorium on its debt. It surprised Wall Street that thought Abu Dhabi and other oil-rich creditor neighbors would back stop nearly $60 billion of Dubai’s debt, in large part used for real estate speculation and ending with a desert full of “see-through” edifices.

Given the assets behind most of the non-European bank creditors, I suspect access to funding won’t be an issue in the foreseeable future. The absence of follow through selling and yesterday’s bounce appears to support that view. Word that Dubai World is already in talks to restructure $26 billion of debt likely kick starts stock market strength today.

The Market Trend Indicator (MTI) remains in an Uptrend but the spread versus their 18% averages narrows as prices trade sideway,. This week, the SPX’s 18% average is 1067.97 this and the DJIA’s is 10,309. The New York Advance/Decline line is 2,615 net advances above its 18% average.

Friday’s selling kept the advance from qualifying as a short-term rally, so there’s no change in peak numbers and net volume has yet to confirm the MTI. Still, peak readings on the decline into November 20 were only (31.9) and (42.6) for the NYSE and NASDAQ respectively, figures that didn’t reconfirm downtrend versus +56.4 and +56.1 readings on the preceding rally and set relatively easy hurdle rates.

Other than a transition favoring large cap stocks versus small cap, there’s been little change in the best performing groups. Those with the most momentum (Precious Metals, Gold Mining, Copper, Coal and Paper) are linked to dollar weakness while Automobiles, Travel & Tourism, Railroads and Consumer Finance play into economic recovery but my bias doesn’t lead to a long run in these areas. Health Care Providers and Pharmaceuticals are climbing up the ranks through the market’s consolidation.

Bond prices are nearing my recommended stop sell point just above the October 20 high of 97.25 (using TLT as a proxy). If stopped out, my plan is not to reverse the trade but come back and play the short side another day. I included a long-term 30-year  Government Bond continuation chart from CitiFX. I think the high in December 2008 marked the end of a 27-year secular bear market and a primary bear market is in effect.

It’s the 13^th swing for the downtrend U.S. Dollar index’s weekly swing chart, an extreme pattern and long overdue for a rally. The monthly chart offers little encouragement but I’ve got my eyes open for the eventual reversal.

Gold is starting to grab attention. The CME (Chicago Mercantile Exchange) decided to allow gold to be used as collateral for margin on all commodities. Meanwhile, the U.S. Mint ran out of one ounce American Eagle gold coins and suspended sales. I would prefer to add to positions as the dips pass and my recommended stop sell point is just under the September 29 low (989.50 2^nd London fix).

Professor Henry Pruden, PhD and I are scheduled to present at the Technical Securities Analyst Association of San Francisco (TSAASF) 2009 Roundup luncheon on December 10. It will be at Alfred’s Steakhouse from 1:00-3:30 pm. The cost is $44 for members and $49 for non-members. The steaks or salmon are excellent as is the wine (included).

It promises to be a good time, attended by savvy and often opinioned traders and investors. To reserve a seat, you can pay with PayPal at www.tsaasf.org or send a check to Hank Pruden at TSAASF, Golden Gate University, 536 Mission Street, San Francisco, CA 94105.

Hank’s topic at the TSAASF luncheon, The forgotten man: Finding Market History That Fits, reveals how he selects historical precedents. His book, The Three Skills of Top Traders, is a comprehensive guide that brings together pattern recognition (Wyckoff methodology), behavioral models (systems building) and mental state discipline. Here’s  link to Hank’s “Shortcuts, Quick Peeks, and the Midnight Oil: Pathways for Making a Buck in the Market” at www.youtube.com/user/HankPruden.

I was asked to come with my 2010 forecast but I don’t play that game. I think it’s best to minimize preconceived notions, and my topic is the same as this letter’s proposition, Plan Ahead and Follow the Trend.

Although the TAASF is the oldest technical analyst society in the nation, it is not associated with the a Market Technicians Association (MTA) as it seeks to maintain a neutral position between the MTA and IFTA (International Federation of Technical Analysts) but it looks to me like that war is already over with MTA victorious. A MTA-sponsored San Francisco chapter started this year and it appears to be drawing more young professionals in the business. For details, go to www.MTA.org or e-mail Ken Winans (kenw@winansintl.com).

Keep in mind that dividend distribution dates are near for exchange traded funds. It is particularly important with leveraged and reverse ETFs because there can be large negative tax implications if held on the date of record. Last December, the capital gains distribution at one inverse ETF was 73% of its net asset value and three others were in the 20% range.

Behind the distributions in 2008 was a meaningful run-up in the value of underlying contracts followed by significant redemptions. ProShares, the sponsor of my favorite leveraged and inverse ETFs announced zero capital gains distributions on its leveraged and inverse funds.

 

Bloomberg reported this morning that corporations cut expenses another $240 in the third quarter, positive for corporate earnings (important to Wall Street) but a continuing drag on employment and consumer demand. So far so good for consumer discretionary stocks but note the weakness in broker-dealer stocks as reflected in the iShares Broker-Dealer ETF, signaling perhaps this advance in long in tooth.

 

Conclusion:

Discipline, tactics and money management are more important than predictions. The uptrend deserves the benefit of doubt until proven otherwise. I think a SPX close above 1113.68 (November 16 high) could trigger a price spike. If that happens, I would raise recommended trailing stop sell orders on ETFs tied to the SPX to just under the November 20 low (1086.81) from just under the November 2 low of 1029.38. Once the trend reverses, think some of the best shorts are likely to ETFs tied to small cap indices.

 

 

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.