Break Out the Weekly Charts!

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  • on April 22nd, 2011

After 8 weeks of chop and halfway through earnings season, we’re nearing the point where weekly charts make more sense than daily.  It hasn’t felt like compression because we went straight up, then straight down(17 days of Middle East + Japan), then straight back up(16 days of rebound), then quickly down(6 days of early earnings + S&P downgrade) and back up(3 days & counting), but each day brings us closer to a resolution of this congestion.  With that, our risk/reward potential stretches well beyond “yesterday’s high or low”.

Look at the big winners like $NFLX, $AAPL, $PCLN, etc.  The weekly trends marched forward, twisted around by daily noise but unaffected in its path.  That noise is the reason short-term traders(myself included) often miss huge moves.  Right here, though, it pays to step back with broader perspective.  The first question most of us hear today is “Why does the market keep going up with all that’s going on?”  Exactly.  As Josh Brown put it in this humorous but dead-on post “the sentiment isn’t bullish or bearish; it’s absent entirely”.

Whether we break this range up or down is a mystery, though the ability to linger near the obvious resistance around $SPX 1335 despite widespread doubt and apathy puts the eventual odds on the side of the bulls.  Hunt around the Internet for bear stories and they won’t be hard to find because the case is well known, easy to make, and makes us look smarter than the “fools” putting their money at risk here.  Bullish stories?  A little harder to find, though fundie guys like Todd Sullivan and James Altucher have been relentless bulls and many fine technicians are laying out the case for a major bull move.

I suppose I should make my own case for the direction, but I’d prefer to simply acknowledge that the latent energy is there for a move of huge proportions, and manage my positions accordingly.  That means worrying less about daily levels and more about weekly levels.  It means fighting off mean reversion tendencies and grasping the potential of a runaway move(vacuum style).  It means thinking of targets in terms of measured moves rather than recent boundaries.

My biggest reluctance of late has been my inability to identify new big cap leaders beyond the popular names of 2010; then a dead stock like $JNJ screams through 100+ days of highs built into its scalp-a-thon.  Even $INTC gave it a shot this week.  The most dominant theme of the past decade has been P/E multiple expansion in the small sectors previewing our future but multiple compression in the big brand names of old.  A reversion of this theme would be most welcome, and maybe the ability over the past month for $XLP and $XLV to sustain a rally can usher in a shift of that big theme.

Most of us have reluctantly embraced a bull market that we doubt but hope others doubt more(future converts, right?).  I wasn’t trading in 1983, but I was in 1996 and 2004 and I remember feeling the same doubt.  Those two instances prove nothing for the market ahead, just that a failure to imagine all scenarios puts us at risk of every bias in the behavioral handbook.  Inside the range, the risk/reward is heavily in favor of selling this upper end and keeping our timeframe short.  Just remember that soon enough, $SPX 1275-1335 will be the numbers that mattered until they didn’t…brush off the weekly charts for the next phase.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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