Market Timing / Market Direction – Bull Break Out?

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Market Timing and Market Direction often make distinct patterns that are readily seen and can be matched with historic similar events. Right now market direction is showing a rising wedge pattern in the S&P 500. The market is showing lower highs and higher lows. A rising wedge pattern often is a sign of a market in turmoil, but also a market that will break one way or the other.

The rising wedge pattern that my present market timing shows, is not surprising considering all the bad news, in particular Europe. But think for a moment about Europe. With the continent’s 4th largest economy deep in debt and bond yields climbing shouldn’t the overall market be lower?

My market timing indicators show that for a second day, advancers far outnumbered decliners, 66.7% advanced versus 17.1% declines.  Yesterday the numbers were not as good with 53.9% of stocks up and 29.2% down. The bounce on Thursday was to be expected after such a drop on Wednesday but today’s move could have gone either way. With what is being perceived as good news out of Europe the market moved a lot higher on Friday than perhaps it would have otherwise.

Market Timing / Market Direction Shows A Rising Wedge Pattern

Market Timing / Market Direction Nov 11 2011

Market Timing is showing a rising wedge pattern. Is market direction changing to the upside?

The chart above shows the rising wedge clearly. While many investors dismiss market timing and these types of patterns, I have seen this pattern develop many times over the past 35 years. To understand what market direction the rising wedge may break to, requires including a number of market timing indicators besides just the stock chart itself. Use this market timing link to view an S&P 500 chart for the past year.

Market Timing / Market Direction – Upside Breakout Indicators

The move on Friday placed more stocks in bullish patterns. Two days do not a rally make but it does show a possible market direction. The rising wedge is a pattern I have seen often and while the chance of the market going one way or the other is 50/50, there are other market timing indicators to take into account including the advancers versus decliners, momentum, RSI which is moving higher (Relative Strength Index), and MACD and the Ultimate Oscillator which are all moving into more positive territory. My guess on market direction based on my technical indicators is that the market will break to the upside.

Market Timing / Market Direction – How High Can The Breakout Go?

With the market timing indicators showing me that the market direction has a good chance of breaking higher. The question is how high? Looking to the past, after markets have had a good rally in October many times the November – December Rally (Santa Claus rally), moves another 6% or so. 6% from this level would add 75 points to the S&P 500 or bring it to 1338 on the S&P.

Looking at the S&P chart you can see how many times in the past year the S&P climbed to 1338. Market timing may be dismissed by many investors, but you can clearly see how often the 1338 level has been visited this past year. Market timing then would seem to show that the market could try to climb the 75 points and re-visit the 1338 level by Christmas this year.

As well based on the charts 1338 will offer very stiff resistance to a move higher.

Market Timing / Market Direction the S&P 500 chart 2011

Market Timing / Market Direction - How High Can The S&P 500 Go?


Market Timing / Market Direction – What Could Derail The Rally?

With things in Europe already pretty bad you would think the S&P 500 would be below 1200 if not down around 1000. Therefore it is going to take a pretty big event to derail this rally. In my opinion it would have to be something a lot more major than what we have seen coming out of Europe.

Another country entering severe debt issues might do it, but could that drive the S&P below 1200? Personally I don’t think so. It would still have to be bigger. A large bank failing perhaps or Greece and Italy deciding that default is better than austerity measures. That might do it.

Market Timing / Market Direction – The Cautious Bull Continues

The cautious bull strategy has proved very effective this year. My portfolio has increased by better than 20% for a third year and I am still staying fully invested. I believe the chance of a stock market collapse before year-end is nil but January could see weakness return to the stock markets. Meanwhile I will be staying with selling out of the money puts and in the money covered calls.

It’s important to remember that Bear Markets push indexes to the extremes which can mean rallies that run too high and plummets that plunge too low. While market timing can be used to judge market direction, it cannot estimate over exuberance on the parts of bear markets so it is worthwhile to remember that any rise this fall could easily be given back in January.

  • Ted

    Can you direct to an article where you discuss your in the money covered calls? I have not been able to find it on your site. Thanks!

  • Go to the search box and type in within quotes “in the money covered calls” and you will find all the articles on my site dealing with in the money covered calls.
    If there is something specific you are seeking, send me an email or post it to the comment field somewhere and I will see what I can do for you. Remember to use the quote marks when searching. In the money covered calls is a very good covered call strategy for markets such as what we are presently experiencing.