I'll start off with the bad news. The bad news is there's not too many people crying bull. From CNBC To Fox Business, to Money Magazine, to just about every other news outlet you can find - The market looks doomed. The current issue of Traders World magazine doesn't help much. Eric Hadik of INSIIDE track is calling for 1-3 years of bearish behavior. And in the same issue Robert Giordano is calling for DOW support at 7150. Could they be right? Yep - they could be. They could also be wrong.
Take a look at this chart:
Okay, I know at first glance it looks like Chinese... or something. But there really is logic here. From a pure theoretical standpoint the bears could be right. There's the whole 17 year theory, the 34 year theory (which go together by the way) the presidential year theory, the "I made up a theory" theory - and not to mention the extreme negative bias by the media which tends to manifest in bearish behavior and sentiment.
However, from a pure charting standpoint there's hardly any reason to be bearish - in fact there's almost completely nothing but bullish signals. Let's look at a few of them.
First of all let's talk about the support line: My personal lines for support sit between 7500 and 7750. Giordano could be right with his 7100 range but I think that's pretty forgiving, certainly when paired with what I'm about to show you.
1) line construction - Giordano must be drawing his lines off of candle wicks. It's fine, but sometimes not consistent. I'm drawing mine off of a line chart.
2) Iterations - There's really only once way back in 2002 where support was found in the 7100 range, however there are 3 times on the line chart where my support held. And when we add candles for confirmation there's a total of 7 iterations dating back to '97! (This is using a weekly chart)
3) With a daily chart we see massive support in Oct. '97, Oct. '98, Jul & sept 2002, March 2003, and assuming it holds now oct/nov '08.
4) Patterns: There are currently no trends in place. We see a sideways channel. A channel can last for 3-4 months, or I've seen them last a year or more. A few years ago SHLD channeled sideways for right around a year. All it means in the broad picture is things are going nowhere. Already this channel has lasted 3 1/2 months. Who knows when it will break.
5) Candle Pattern: On Friday Oct. 10 we saw a massive dark candle at lunch time. At one point the market was trading around a 2400 point loss for the week. But by the end of the day we regained some value and closed the day with a high wave spinning top candle (or close enough). THAT is how bottoms are formed. I told my wife on that day "this is a good sign". Then just a few days later on the 27th & 28th we saw a massive bullish engulfing signal. Good sign #2. As is common during a basing period we saw one more major test of the bottom on Nov 20 & 21 (highlighted in yellow on my chart). The 20th threw a long dark candle, and the 21st completed the tweezer reversal pattern by showing the exact opposite on the next day. When this candle pattern occurs at the bottom of a trend it is most often a bullish reversal signal.
I will make note back in Sept I pointed out the falling 3 wedge pattern and said in the next few days expect the market to break to the downside. I was right then, and once again this candle pattern will likely provide at least some bullish move.
The sideways move we've seen in the past 3 months is completely normal and symptomatic of a market forming a bottom. Take heart if you're worried. It's very true that the other bearish indicators may prove to push the market lower, but I personally find the chart patterns to be quite accurate.
The trick about technical analysis is to balance all the different indicators. The bear guys were right - but now I think the chart is taking over and the bulls are about to run. Of course, it can all change tomorrow!
During these sideways markets my personal favorite strategies for trading are to sell options and trade as neutral as possible. Every day can be a new adventure. A lot of stocks are set up perfectly for complex option strategies. You should be able to find plenty of stocks to write Iron Condors on. And of course if you're down a bit and want to just make some income start writing some covered calls. You can recoup a good portion of your losses a lot quicker than you think!
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