Technical Talk: Stock markets – expect the unexpected

The comments below were provided by Kevin Lane of Fusion IQ.While it should be a quiet holiday week of trading, we have grown accustomed to expect the unexpected! As the NY Football Giants so shockingly reminded us all yesterday, anything can happen at any time – as the old adage goes: “it ain’t over until it’s over!” While there are only two weeks left in 2010, and the end of the race is in sight, history teaches us you can’t just put it in neutral … you still have to run across the finish line for it to count.While we remain aware of the bullish sentiment and divergences that are developing between price and momentum, our strategy remains to ride open long positions higher along with this current uptrend while simultaneously raising/tightening our stops. While bullish sentiment and momentum divergences are present they can and do in many cases go on for some time before the market corrects. Seeing that our crystal ball is in the repair shop, we opt to not try and time the exact top but rather let the market naturally take us out via stops being triggered.It may in fact turn out to be a slow week, but now is the perfect time to review risk management plans AGAIN!That said let’s get an update on where we stand with the broad market S&P 500 Index by examining the weekly chart below. Here’s what we see: the S&P 500 is now up 86.80% from its March 2009 low and the Index is now testing the upper end of resistance (upper red line) in the 1,250 range. There are now less S&P 500 issues above their 50-day moving averages and making new 52-week highs than when we made our earlier market peak back in April of 2010. So while the preconditions for a correction exist they are not actionable until you start to see selling picking up and the number of decliners starting to decidedly edge advancers for a few days in a row.However, history tells us we must respect the trend and all trends still remain up. Even the minor uptrend (purple line) is still up and intact. Initial support on the S&P 500 remains near 1,227 and 1,200 respectively. Only a move below the latter level would be taken as a negative.Source: StockCharts.comLooking at an upside target, if 1,250 is taken out we could see the S&P 500 extend this rally towards the 1,300–1,320 region.As far as other markets are concerned, we remain negative on bonds, particularly municipals, but bullish on the US dollar. Our current allocation towards equities is approximately 60% after some recent risk management triggers kicked in.Anecdotally we see that the majority of sell-side strategists in Barron’s are bullish. This is a negative as not only has their collective track record been poor (over the years) but many of their models are driven by lagging economic data and valuations, which tend to be poor forecasting variables. Market advances are driven by greed, liquidity and false trading successes that induce investors to use leverage. The culmination of these aforementioned factors is akin to rising from the bottom to the top of a roller coaster (i.e. upward momentum or buying power builds until it peaks, then near instantaneously it is lost and prices fall like the coaster).So the moral of this story is to be proactive and prepared!Source: Kevin Lane, Fusion IQ, December 20, 2010.Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.