Swing Trading Strategies & Stock Picks Since 2003

I will attempt to keep this short and sweet. I think what most investors are worried about is whether this market has begun a new bull market or is this rally simply a quick countertrend rally in a much larger bear market trend. I think it is best to answer that question by looking at longer-term charts. For a discussion of what I thought the tops might be, go back and read this post.

Monthly charts:

For the most part, monthly momentum is still positive, but as you will see from these charts, we are bouncing off of the resistance levels set back during the first phase of the bear market in 2003.

$SPX It does appear that the loose confluence we found in March does appear to be the current top for this index. While monthly momentum is still positive (as seen from this monthly chart). The recent rally to 956.23 just bested the 2002 rally at 954.28 that preceded the double bottom retest in 2003, The month of July so far appears to be a bit weak. ISM service jobs numbers will be out this week and if that shows the same weakness as last months employment numbers, one might imagine that there could be further weakness in the index. I think earnings for calendar quarter 2 2009 (and the forecasts for the second half), will set the stage perhaps for a correction, depending on the severity of the forecasts and results. What will be the target for the end of the correction. One can guess for now at least one of two ways:

1) A head and shoulders correction: 814.53 would be the target of this slightly skewed head and shoulders pattern. The critical break on this pattern would be a fall below the 878,94 level.

2) The Fibonacci patterns are less certain, but the 0.618 retracement of the March 6 low to the 6/11/08 high is roughly 777.47. As time moves forward I can be a little clearer as to that target.

$INDU As you can see from the monthly chart, the $INDU did not take out the first momentum high hit in the 2002 bear market recovery (9043.37) when it hit 8877.93 in June 2009. Though the $INDU is only an index of 30 stocks, I still believe it will fall under the same generic conditions I stated above for the $SPX. Any signs of employment weakness or consumer abandonment will likely make this index drift lower also. How low can it go? (If you permabulls like gallows humor you may listen to this), The head and shoulders pattern suggests a low that could reach the area between 7750 and 7437.59 (somewhere around 7500). For this to happen, we would have to break below the left shoulder at 8221.01. As the $INDU has a rather flat profile, that seems a very doable prospect. If the ISM service sector numbers are weak, the odds are likely greater than 50/50 that it will be broken. Though the Fibonacci patterns are a bit weaker in this phase of market action, the 0.618 retracement of the March 6 low to the June 11 high is about 7393. As you can see, there is some price support down at those levels.

$COMPQ It appears that this index too has hit a wall of resistance near the mid 2005 lows of 1889.93 when it failed to get above 1879.92 in June (see monthly chart). If this resistance is not take out, I think the $COMPQ could be faced with a correction of its own, as it has been quite hot compared to other indices so far this year. What is next? Perhaps the best way to look at this one for a near term forecast is to look at the daily chart.The XABCD pattern established by the first correction that ended June 23, 2009, would have a target low of somewhere near 1720. There is a loose band of confluence between 1710 and 1720. Major support on the $COMPQ is 1598.50. The 0.618 retracement of the March 9 to June 11 rally is 1500 roughly. I am not certain that target is in danger, but a lot depends on the consumer and the unemployment environment that exists now, in my opinion.

Conclusion: If July is a month of correction, then the next major market move is down. Near term $INDU targets is 7500, near term $SPX target is 814.53 and $COMPQ target is 1720. If for some reason earnings forecasts, world events, or other calamity hits, these targets could go lower, but I think its way premature to be forcasting doom or getting really panicky. I think this could end up being a normal correction, but will just need to be watchful.

The potential weakness in this market likely be caused by continued employment weakness. If the consumer is strapped, then no one buys things. This data will be reflected in company forecasts as we go into earnings season beginning this week. If for some reason employment turns and the economy turns, then this scenario could be completely different. What this Administration and Congress needs to figure out is how badly do they want to strap the consumer with higher energy costs (which keeps them out of the stores) and how much they want to strap small business (which employs all those folks who go to the stores). The answers to these questions will be the determining factor for which way this market moves going forward. The patterns as they stand now suggest more weakness and a potential retest of the March lows in the very worst case scenarios. As traders, we need to be prepared to be ready on both sides, long and short, and keep our bearings on the trade plan.

If one is a long only investor, I hope I have shown you via these charts that no one is forcing you to be long this market, and that patience is a virtue in making decisions. I said many months ago that what happens in this next correction will determine the course of the next four to five years at a minimum. I think we are in the midst of facing it now, and that is why I am taking my time with it. I was not excited about this market in 2003 and I am still not excited about it now. That is why I have been looking at alternative investments (land, etc), working on building my forex systems (which I hope will be going in the next couple of weeks), and being ready with long short strategies involving ETFs (but on a very selective and primarily intra-day basis with many of them).

I am not a permabear or a permabull. I basically call them as I see them. I am a pragmatist that looks at all scenarios and deals with them as they come. Your job as a trader and investor is to understand your own risk tolerance and build a plan that suits your style and appetite for risk.

I will still be working on systems this week and dealing with electricians in this old house. More is coming. Stay tuned.