In last week's column, I told you that the Super Chart was close to handing us a new signal. In fact, the S&P cash index closed at 1,413.90 — well above our 1,398 stop out price — last Friday. So, for the record, we are sitting on the sidelines and waiting for the next signal to develop.
It turned out just like I thought it might back in February. For just the second time in 43 years, the Super Chart gave us a bogus sell signal. The first was in 1987, as I have told you before.
So, now what do we watch for?
From here, only one of two things will occur. We will cross up over the Super Chart Keyline and close above it for six consecutive weeks, or we will close below the 1,331 old sell signal for 3 weeks consecutively and resume our sell mode. In the first case, it will be a bullish buy signal, and in the second, it will be a bearish sell signal.
Those of you who follow this column every week know that I suggested you commit half of your portfolio's available cash to stocks. I recommended adding to longtime blue-chip positions you hold and buying stocks that were on your watch list. If you followed that advice, you are clearly the richer for it today.
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Now the question is, since we have been stopped out of the market for now, what might we expect until we see either of the two signals described above?
First, let me tell you what I see the charts saying at the moment, and then I will tell you what to do with your current portfolio holdings.
I have included my trusty Super Chart for the S&P cash index below to help us out. Right off the bat, you will note that the close on May 6 was right at the Super Chart Keyline. Now, being right at any important chart line is important. It tells you that you must at once check what is called the "momentum" portion of the chart at once.
How do you do this? Look at the bottom of the Super Chart. The second section below the main chart is the "momentum measure" that I use and have learned to trust over the years. Reading it is not terribly difficult, but it does take some knowledge of how such momentum measures work.
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Let me describe it just a bit. Note that there are three lines on this lower chart. Each one is a separate momentum indicator. Each one is set at a different "speed." By this, I mean one moves at a slow speed (covers a longer time period), one moves at a medium speed (covers a shorter time period than the slow measure), and one moves very fast (covers the shortest of all the three time periods).
Note also that the momentum "vertical gauge" has the lowest reading possible of 0 and the highest reading possible of 100.
Now with that explanation, let me interpret this chart for you. The red line is the slowest speed one. It currently has a reading of 26.33 and seems to be leveling out at this area. This tells us that we have begun to see the decline that started back in the middle of 2007 moderating and at a much lower level than when it started down in mid-2007 near the 100 level. That's good news.
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The yellow line is the medium speed measure and reads 48.2. Its tracing on the chart tells us that during the shorter time period it measures that, after it first went as low as the 10-15 level in February of this year, there has been a rally. It now has reached the near 50 level reading, or what is often called the "neutral" level. But, at the moment, this may not be such good news. To better tell us what kind of news the medium (yellow) momentum measure is indicating, we must read the fastest one, the pink one.
Here is where we find the rub for us at the moment. The pink line currently reads 90.24. That is very high. Whenever we see readings this high, it is definitely a caution warning, especially if the very slow measure is below 50, which it is. This combination of a very high fast reading and very low slow reading usually indicates a selloff of some sort is near. Not good news, depending on your trading time frame. Let me explain.
As the expected selloff proceeds, the pink momentum measure usually just drops to the 50 or neutral area first. That will be the first level at which I will take special note. If the pink decline stops there, it is quite possible that this will be the extent of the pullback and we can again look for buying to kick in. If not, if it continues down, we may well see the pink indicator drop to the 10 to 20 area before it slows. Not good news for us, usually.
I have often told you that sometimes the best answer the chart can give us is that we will learn what to do "within the next 30 to 60 days." In this situation, that holds true. I expect that the price action will do one of two things over the next 30 to 60 days. We will either see a price drop back to the S&P 1,390 support marked on the Super Chart (we crossed above that several weeks ago) to now test this level for support (it was the old resistance level), or we will break below this level and try to test the S&P 1,325 level we broke above over a month ago. Remember when I said it depends on your "trading time frame" above? Here is what I meant. I suggest that short-term traders (six months) exit positions for now and that any pullback to the 1,390 area be watched closely to see if reentry is warranted. I will keep you advised of my thoughts on this as the test proceeds.
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For the medium-term trader (six to 18 months), I suggest some cautious buying at the 1,390 area. If it breaks, then watch the 1,325 test and if it holds, be a big buyer, as I believe it will be the final test of lows we will see for some months. And we could go to new all-time chart highs from here.
For good measure, let's revisit the Dow Transportation Super Chart I showed you several weeks ago. If you recall, I told you that if it broke above its Keyline and held there for several weeks, the likelihood of this market breaking down would be reduced substantially.
That is just what has happened. The Keyline has been broken to the upside in a very big way, wiping out not only the very long-term down implication of the head and shoulders formation, but doing it in spades! Note, also, this chart is actually testing its all-time high this week! Fascinating!
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For those of you who are long-term traders and follow my monthly newsletter, High-Yield Income Investing, and its Weekly Updates, this action of the Transportation chart is a signal to commit a major portion of your available cash to the market. Stay tuned for the newsletter for additional recommendations for your portfolio.
So, there you have the latest update to the charts. However, as always, one caution that I repeat every time I give you such a broad look at the market remains: Remember that the charts tell us their story in percentage levels. No signal is 100 percent right — ever!
The Transportation chart is saying that there is an 80 percent to 85 percent likelihood that you will do very well, especially if you are a long-term trader. But, there is always that 15 percent to 20 percent chance that the prediction could fail. To guard against this possibility, all we will need to do is to keep our eye on the charts. If somewhere along the way they do falter, we will have plenty of time to exit, take some profits quite likely, and prepare for a potential reversal.
Right now, I want to see the extent of the near-term selling that I expect to develop soon and then, after this test, see if the Super Chart Keyline generates a new buy signal. That buy signal from the Keyline will add loads of comfort to my buying activity, especially for the medium and long term.
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That's all for today. I trust that you found this analysis was helpful. And I do hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
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