It is always about perspective, isn't it? If you are young, you are usually glad to have a birthday roll around. You know, parties, friends, fun, and all that is just great. But, as you get older, you often find that you would just rather forget the whole event. You are speaking to a real authority on that one!
Or if you are a New York Giants fan, you love the idea of a Super Bowl — you just love them! However, if you're a New England Patriots fan, you are more likely to be saying "Super Bowl? Bah, Humbug!"
And if you're a stock market bear today, you are rubbing your hands together with glee and loving every moment of it! However, if you're a fully-invested bull, well, you can fill in the blank as to how you are feeling.
But, the one thing that is a constant in all of it is that the situation is only temporary, good friend, only temporary. To survive you need to be willing to change your tactics, adjust your outlook, and, as I have told you before, remember the famous words of Jesse Livermore: "There is only one side of the market to be on and it isn't the bull or the bear side, it's the right side."
All that said, may I present the right side as of this week. It is the side of caution if you must be a bull, and the side of caution if you must be a bear. If you are a bull, keep your powder dry and wait cautiously. If you are a bear, spend your money cautiously and be always alert to the possible reversal of the markets against you.
Story Continues Below
Remember, there are huge groups of folks out there trying to reverse the decline we are experiencing. Somewhere, they will succeed, and it is usually just when you think things will continue to go your way. I have walked this road many times before and, believe me, a humble heart is the best one to have. Arrogance as a bull or arrogance as a bear is always the prelude to getting ones comeuppance and usually in spades.
If you are a regular reader, I hope you took my advice several weeks ago and lightened up on your portfolio, or several months ago and bought some put LEAPS as insurance. If you did, you are probably going to weather the current selling surge with possibly some minor pain, but certainly no disaster. If you didn't do either, well, then you do need to listen especially close to what I have to say this week.
But, let's begin where I promised you last week. Let' begin with the Super Chart and its Keyline.
I am first going to show you the S&P chart and, second, the Dow chart and what appears as a classic head and shoulders formation that you need to be aware exists on this chart.
Click for Larger Image
First, the S&P chart above. I have told you before that I use it for Super Chart purposes because it is much harder to be skewed by traders since it represents 500 and not 30 stocks. As of last week, I told you it would be quite unusual to see the S&P cross back above the Keyline (currently at S&P 1413) before the close tomorrow. Now, it would not only be unusual, it would set a record for a move on the S&P never seen before! So, let us accept that the Keyline has been crossed to the downside for six consecutive weeks and that the mode of the market, according to the Super Chart, is now full blown bear mode.
[Editor's Note: A U.S. Recession Is Now Unavoidable. Take These Urgent Steps Now.]
The history of the Super Chart tells me that you need to do three things if you have not already done them. First, get to cash on all of your stock holdings that are less than 12-15 months old and where you have a loss of 10 percent or more. You can unload others, of course, but that will be your personal portfolio choice, not something I can really help you decide. The idea is to raise cash for future use.
Second, you should only be a buyer of stocks that you already own and which remain, at least in your thought, "blue chip" quality. And only if you would like to cost average these holdings for long-term capital gain purposes. Yes, the markets will go up again, but your time horizon will need to be in the one to three year category, not the one to three month category.
And third, each month allocate a fixed number of dollars to a money market fund. Why? Simple. When this bear has run its course, there will likely be some very good values to be had for the long-term investor. You should have as much cash as possible to take advantage of them. The long-term payoff will be incredibly good when the time comes to buy, believe me!
When will it come? The Super Chart will tell us that. It got us in the buy side in June 2003 when just about everyone was still bearish and it will do the same again. It has not failed me since I began to keep it over 39 years ago (May I include another thank you to my old friend Roy for showing me how to do it? Thanks, Roy!)
I have marked on the S&P Super Chart the current support levels to watch for any further down moves. Use these as a guide to when a support holds and begins to give us an inkling of a possible bottom having been reached.
Now, let us look at the Dow chart and the potentially classic down head and shoulder formation that I see there, as I told you last week.
Click for Larger Image
True head and shoulder formations are really rather rare in the charting business. Oh yes, some analysts will point out what they call a head and shoulder chart, but they are more often than not "unbalanced," or a stretch of the imagination rather than a true head and shoulders.
A true head and shoulders formation has what is called a "horizontal neckline." The neckline is the line that is drawn from left to right on the chart and the entire formation is above the neckline with the "right" and "left" shoulder portion of the formation stopping right at the horizontal neckline. I have circled the "left shoulder" on the Dow chart so you can see what I mean. The upper heavy orange horizontal line is the horizontal neckline.
The "right shoulder" is just now pulling down to the neckline, as you can see, but is still above it. Whether it will be by tomorrow night is another question. The next step for this formation is to have prices cut down through and close below the neckline. I would say in this case, a close in the 11,600-11,700 area would be quite sufficient to qualify as a good "break down."
Next the prices should, within a several week time period, pullback up to the neckline area. Once this has occurred and the prices have not crossed back up and closed above the neckline, the down move predicted by the head and shoulder formation begins in earnest.
[Editor's Note: Seven Investments Poised to Soar in 2008]
About 80 percent of these true formations will fall the full distance that is measured by a line from the highest price reached above the neckline (in this case, about the Dow 13,150 area) and the neckline itself (at about the Dow 12,100 area), basically a 2,000 point Dow down move.
The down move from the neckline is then that distance, in this case to about the Dow 10,000 area. I have put these distances in heavy green vertical lines both above the neckline and below the neckline for you to see more clearly, and at the bottom of the predicted move I have also put a heavy orange horizontal line at about the Dow 10,000 area.
So, there you have it. Those of you that are chart buffs will see quickly the potential here. Those of you who have heard of such a formation from time to time are looking at a truly classic one. If it does break down through the neckline, just keep your powder dry until we see if the fulfillment is accomplished all the way to the 10,000 level.
About 80 percent of the time, it usually is. But, I repeat, it must break below the neckline and pullback to the neckline without closing above the neckline on the pullback before it is a truly "active" head and shoulder formation. And don't forget, 20 percent of the time these formations will not follow classic rules. But, 80 percent is a pretty heavy number to bet against!
So, there you have the story this week. We are officially in a bear mode under the Super Chart. And remember, that it has not been wrong by much over its 45-year history. That is an impressive record and one I truly respect.
Oh yes, there is one more thing. The Super Chart can reverse on us at any time, so you need to be very alert to such an occurrence. And there is a stop to the Super Chart bear mode. If it pulls back higher (on a close) than 5 percent of the close tomorrow night, the bear mode is officially cancelled.
Thus, if you chose, as some may, to short on the Super Chart signal tomorrow night, all shorts should be covered at that point. I have never taken more than a 5 percent loss with this rule — except for the event in 1987 that caused me to establish this rule. In that Major Market Turnaround MMT) the Super Chart lost 11 percent and prompted me to add this 5 percent pullback rule.
Do hope your investing week is a good one, as always. And in the meantime, you keep in touch. I do! See you next week.
Editor's note:
Special: A Bubble on the Verge of Bursting. Act Now.
Our Options Plays Are Up 60%-1593%. Don`t Miss Out. Go here now.
Why the Fed Interest Rate Cuts Won`t Work
