Draining the Excess

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  • on December 4th, 2012

The goal of a healthy consolidation is to drain excess bullishness without disturbing the underlying momentum. So far, we haven’t disturbed the positive energy coming out of the November 16 low, but as the current digestive period ages we need to take note of what goes on under the hood. The following graphic shows(I hope) some of the key metrics that we can watch in judging when this sideways pattern morphs into a continuation or reversal:

The key days are easy for me to remember, November 6(Election Day) and November 16(my wedding anniversary). Those were the times when other timeframe players emerged to thwart the preceding swing, and give us a good way to anticipate the eventual trend that may emerge from what is now a 4 week trading range just below a slightly falling 50 day average for most indices.

Inside my universe of stocks, those days mark the multi-week peaks(Nov 6) and troughs(Nov 16) for a large chunk of liquid stocks. On a short-term basis, the November 28 low of 1386 and December 3 high of 1423 take precedence but I believe the earlier dates carry greater significance since more stocks made their own highs and lows.

Obviously $SPX 1428 is a little easier to hit from here than the lows below 1350. If we approach the November 6 high with a number of key stocks surpassing their pre-election high(like $EFA has done quite easily), then we can have confidence that a multi-week/month rally may have legs. If not, then it may just be a retest doomed for failure and a retest of the November lows.

None of these scenarios seem imminent now, so index chop with individual news movers may be the default for a few more days. There will be a time to revisit this playbook; I know it’s not now but with easily identifiable markers it makes sense to at least grasp where a few noisy days inside a larger pattern.


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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