The End of an Era

Jan 17, 2008: 6:29 PM CST

Folks, this may be it – the day when people realized that the ‘easy-go-lucky’ days of the market are behind us and harder trading and investing days are likely ahead.

While there are no guarantees, the odds have now shifted so that the ‘path of least resistance’ is now down on all respective time frames for the US Stock Market.

The Internet Business Daily put it best by stating in their January 16th edition, “The market is now guilty until proven innocent.”

I don’t intend to discuss the finer points of economic theory or fundamental data here, but I will show you some quick charts and why the bias has now shifted to the downside:

First, the Monthly Chart:

With the horrendous and clear break of the 20 month moving average, it appears that the market will end January solidly beneath this crucial zone, the last time it was breached this bad was early 2001 before a bottom was formed in mid-2003.

The S&P 500 Monthly chart shows a similar recent pattern, with the only exception being that the Dow stocks are higher today than they were prior to the 2001-2003 bear market while the S&P index is now beneath that zone. This means that had you bought stocks in 2000, you would have lost money on balance by 2008. That’s not a pretty picture to paint or an easy sell to clients.

Moving on to the weekly charts:

Traders, the weekly chart looks absolutely awful. One can see a potential head and shoulders reversal, broadening formation reversal, diamond reversal, consolidation breakout – you attach whatever significance or term you want to the recent price action and it all points “down.”

A retest of the 200 period weekly average seems to be a virtual certainty (though nothing is in the market), which is actually about 35 S&P points lower (the Dow looks similar in price patterns).

A bounce off this level, or some sort of bounce seems likely, but my guess is larger funds and late-comers will see the bounce as an opportunity to rid themselves of stocks at more favorable prices, rather than a “great and momentous” buying opportunity.

I circled the upcoming “Death Cross” of the 20 and 50 period moving averages. This lagging sell-signal could trigger more selling.

On to the dailies:

The market sliced through the October lows, making new near 52-week lows, after breaking out of a triangle consolidation pattern and forming a bear flag down.

I am not thrilled to announce that the moving average orientation has now turned to the most bearish position possible, with the 20 beneath the 50, with both being beneath the 200.

Momentum precedes price from shorter time-frames to the larger (longer) time-frames, and if the trend is clearly confirmed as “down” on the daily charts, and the moving averages exhibit this bearish orientation, it won’t take long for the same pattern to occur next on the weekly, should the downtrend continue as appears likely.

There’s 101 other ways to analyze the market, but I try to keep things simple and grasp the bigger picture when I can.

Please be careful and realize that it’s better to be in cash or bonds rather than try to hand-pick stocks that are bucking (beating) the overall market’s trend. Don’t be a hero. Trade in the direction of the major indexes and you will find greater success. If you don’t feel like you can trade stocks short, buy bonds or bond ETFs. Nothing mandates you to be long US Stocks unless you happen to be a specific type of fund manager.

At the same time, now is NOT the time to “get short” the market. We are already extremely oversold and odds favor a short-term bounce. If you’re underwater, it might be a valid idea to wait for a bounce to get out of any positions in which you’re panicked. Realize also that you have to be able to sleep at night, and if lightening your position a bit will help, then by all means do it. I don’t recommend rushing out and betting the farm that the market will go down either. Practice sound, detached risk control. TraderMike may have captured the essence of this thought perfectly with extremely clear/simple charts in his recent entry for January 17th, 2008 market recap.

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(Here is a picture I took of the beautiful Chicago skyline to let us know that it’s not all bad out there)

Stay protected and live to trade another day if you believe further downside risk is ahead.

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