Stock Market Update 20 October 2009

Further to my blog of 18 October, I have included a few charts outlining my reasons for switching to a 50% equity/50% cash position in my provident fund account.

Click on all charts to enlarge:


SPX 10 year monthly:



The first of my "long term" charts turned bullish at the end of July when the closing price was above the 12 month simple moving average (blue line). Since that signal the markets have advanced approximately 10%.

I have indicated on the chart the market action the last time we had a bullish buy signal on the 12 sma cross (March, 2003). During that price advance, it can be seen that price ran up into 2004 until it hit the 50% Fibonacci retracement level. At that point, price stagnated in a narrow range between the 50% Fib and the 38.2% Fib until the 12 month sma was able to catch up. At that point price was pushed above the 50% Fib by the 12 month sma and the bull market continued in earnest.

Should the same occur again, I would expect prices to stagnate near current levels (the 50% Fib @ 1122 on the SPX cash index) followed by a period of consolidation between the 50% Fib (1122) and the 38.2% Fib (1014). Once the 12 month sma has had a chance to catch up, that is when I think the next up leg in the market will begin.


SPX 2 year weekly:

The second of my long term charts. A possible bull market was indicated in late March when the Stochastic midpoint crossed 50 in combination with the FORCE Index moving into positive territory (green). It was these signals that I used in my personal accounts (non Emirates) to move into long positions.

Unfortunately these signals are somewhat volatile and cannot be used for longer term holding accounts such as the Provident Fund. As such, I waited for a further signal to signal all is clear.

This signal was given in late July when the 13 week exponential moving average (blue line) crossed above the 34 week exponential moving average (red line).

Note that price has risen to a critical level. It is now at the point where it is challenging the 50% Fibonacci level, the descending trend line from the market top in October, 2007 and the top of what appears to be a bearish rising wedge.

If price can break above these levels, there is a very real chance it could rise to challenge the next level of strong volumetric resistance at around 1200 followed by the 61.8% Fibonacci level at 1228.

The next 2-3 weeks will be critical to watch.


I alluded in my last post to a few charts that persuaded me to enter the market. Here are 2 that I follow:


SPX 20 year weekly vs 89 week sma:



As can be seen, a weekly close above the 89 week simple moving average has an excellent history going back 20 years. Only in 1994 did it oscillate back and forth above and below the 89 week sma before finally settling on a direction.

As of last week, price had closed above the 89 sma.


SPC 20 year monthly vs 20 month ema:



Another chart with an excellent record is a closing price above the 20 month exponential moving average. We need to wait until the end of October to confirm but a close > 1058.60 would be a bullish confirmation.


SPX 6 month daily:



A daily buy signal was generated on Oct 7. On Oct 14 price broke above previous resistance at 1080.15. Based upon this I took a 50% equity position in the Provident Fund account.

A critical thing to consider when entering any position is to have an exit strategy in case the market turns against you. I never enter a position without having a plan to exit. It is critical to limit losses should the trade turn against you.

In this case, if you look at the "nature" of the price advances and declines since the March/2009 bottom, the greatest pullback occurred in the mid June-mid July period. During that time, price fell from 956.23 to 869.32 (86.91 points). However, in hindsight we can see this was not a true sell signal but merely a pause in an ongoing bull market up trending rally.

Using this "fingerprint" from the last decline, we can set a reasonable stop loss in case the market turns against us. If you look at the bottom of the chart, the Average True Range (ATR) is indicated. The ATR is the average price range over the given time from (in this case, 14 days). The 20 day exponential moving average smooths out this data to give us a reasonable figure.

On the day of the short term sell signal (16 June), the 20 day ema of the ATR was at approximately 20. We can see if we had used 4 x the ATR that would have given us a calculated stop loss of 80 points. Given the final decline (86.91 points), we would have been stopped out of what turned out to be not a reversal but a correction of the ongoing price rise. As such, we know that a 4 x ATR stop loss is too tight in this current market.

Based upon this, we can use 5 x the ATR to give a reasonable stop. The 20 day ema of the ATR currently stands at around 14.49. If we calculate a 5 x ATR stop, that would be 5 x 14.49 = 72.45 points. From the top yesterday (1100.17), our stop as of today would be 1027.72 (1100.17 - 72.45). Should prices fall from here that would be the point at which I would sell my position. However, should prices rise I will continue to move that stop up until it is at least break even (1073.19 based upon the SPX price at which I made a decision to purchase my 50% position in the Provident Fund).


Bottom Line:

The markets have had an incredible run off the March/2009 bottom. In fact, it is an unprecedented advance based upon unprecedented liquidity being forced into the market by the U.S. Federal Reserve.

There is an old saying that you do not fight the tape (stock market price direction) and you do not fight the Fed (based upon the direction of interest rates). Both are still saying you need to be long the market.

Having said that, there is no way to tell exactly how this is going to turn out given we are in uncharted waters with the current U.S. government policies. Hence the reason I have been reticent to enter the markets and have done so with only part of my Provident Fund holdings.

I will continue to monitor the markets over the next few weeks but will not be comfortable "all is well" until we can get above the 61.8% Fibonacci level of the decline (approximately 1230). Until that level is surpassed, I am of the opinion that this is still a rally into a long term bear market. As such, I still think that we will see lower prices (below the March/2009 bottom) some time in the future. My work with cycles indicates we will not be in a "comfortable" position until at least 2015.


As of today my strategic position remains unchanged at a 50% Equity/50% USD cash position.**



**Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

dwaynemalone1@gmail.com