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Thursday, November 15, 2007

Is It Time to Get Out of the Market? Not Yet!

Once in awhile I like to republish an article that I have read that seems very relevant. This past year has been troubling as my income from investments has been eaten up by capital losses. I have been seriously rethinking my strategy because of all the uncertainty in the market.

I subscribe to Max Whitmores newsletters. I just received this news letter and its not yet published on his web site. I am watching his key line chart. If the markets violate his chart I think we may have to move into cash.

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Whitmore: It’s A Confidence Thing

I have been through a lot of ups and downs in my 40 years as a broker-money-manager-analyst-columnist and they are always the same in one crucial respect. There comes a moment when one side or the other — the bulls or the bears — blink.

Call it what you will, this business is a business of backbone and beliefs. The beliefs that one carries down deep in his heart of hearts about anything is the true summing up of an individual’s outlook on life and selection of values and ethics to live by. But the even greater part of that heart is the backbone. Call it courage, guts, or what have you, to brace against the storms that seek to shake one’s deeply held convictions.

Now, hang with me on this. This is not a philosophical discussion I am embarking on today. It is a look at what I believe is one of those pivotal moments of our current market cycle where somebody’s about to blink. Yes, I have written on this subject before, alerting you to this coming event, but at that time we weren’t upon the threshold of the event.

In my estimation, the next three to four weeks will determine the direction this market takes for the next six to 12 months. And it will all come down to the same “one moment” I have seen so often before, where one side or the other blinks.
What is it that causes the blink? It is the oldest of old human qualities — CONFIDENCE. In this case, it will be the confidence in one’s studied evaluation of the economic facts against the huge supply of rumors that have filled many pages and talk shows during the last six months or so.

Will this deluge be bad enough that the bulls will blink or will the stubborn refusal of the market to tank finally sap the bears determination to drive the market lower? Clearly, it will be a confidence thing for either side.

Again, hang with me as I would like to digress for just a moment. Early in my career in this business, I was fortunate enough to have met a guy that, as I look back on it now, was one of the most savvy market analysts that I have ever met. His name was Roy Klopper.

He was a contrary son-of-a-gun, he was. Short on talk, unless it was to say something that counted and yet, one of the nicest guys I have ever met. For reasons I still don’t understand, he took me under his wing in those days because I was really struggling to try and understand this business and frankly not doing too well at it.

Roy took me to lunch one day after a particularly tough morning and after a sandwich and coffee (I had to pay — he never gave anything away, he said) he proceeded to spend three hours telling me what it was all about.

The bottom line was, he said, I needed to forget all about studying that huge number of reports I got every week on all of those companies. He told me even the best fundamentalist can’t remember all those facts and figures. He said, “Go to the one place where nobody can fool you. Go to the charts.”

I listened to him and embarked on what turned out to be a four-year study course from Professor Roy. What did I learn? I learned the basics of how to build what I now call my Super Chart. In it is included all the world’s real-time evaluation of what the future holds for investors. He said that it was far more important to listen to what people do versus what they say they might do.

OK, back to business. Just below is my current Weekly Super Chart for the S&P 500, as of the close on Nov. 14.

Can I ask you for one final hang in there? I have been asked quite often why I use the S&P 500 instead of the Dow Jones Industrial Average to call the market moves. The answer is really quite simple.

The 500 stocks are much more difficult to distort with concentrated trading by big traders than the Dow. Often in tough markets, the big money will concentrate on the Dow (comfort food for big money) and avoid the S&P stocks.

The result is a false picture of the market. Let me illustrate. Below is my Dow Jones Industrial Average Super Chart for the same period as the above S&P 500. Note especially the period from 2000 to mid-2003.

The S&P gave a solid sell signal during the week of Nov. 17, 2000, but not the Dow. The S&P never gave another signal until the week of June 20, 2003, while the Dow gave no less than five and, depending on the interpretation, as many as seven false signals. Hope that helps you better understand why I use the S&P.


But now, back to the guts of this column. After a huge 3000-point Dow point from July 2006 to July 2007, the market has seemingly chosen to work a 1,000 point range between Dow 13,000 and 14,000. Such trading ranges are not unusual, but occur more often at the bottom of a decline, not the top of a move.

A trading range at the top of a move is, 75 percent of the time, a “cooling off” move, “a correction in time” Roy use to called it.

The length of this correction period is usually best timed by counting the number of times the correction touches the bottom and top of the trading range without breaking through it to the upside or downside.

This current correction has touched top and bottom four times (including the new high as touch No. 1. And count the last touch No. 4 as last Friday, even though it did not close right on the trading range low at S&P 1432.

I have seen trading ranges go as many times as seven touches before they break — usually BIG! So, yes, we could still see as many as three touches before one side or the other blinks.

But I think that this trading range, being at the top of the move, leans more to the fewer touches (say four to five) before the breakaway. That puts us very, very near a possible break-away move.

So, what does my deep-down confidence say will happen? Well, both of the bottom touches in this trading range occurred above my Super Chart Keyline, 35 points for the first touch and 55 points on the fourth touch last Friday, but both were clearly above.

Experience tells me when this happens the move has a probability of better than 70 percent to 75 percent to break to the upside when all is said and done.

But, we are close enough to the Keyline to have to keep a close eye on it the next several weeks. We had a very similar situation in July 2006 and in that one the bears blinked first. Then, what a beautiful rally!

Bottom line is that despite all the fears, rumors, ups and downs of the market, scandals, and potential (notice I said potential) disasters looming in the background, the majority of traders still see a good future in the market — at least up until the close on Tuesday. For now, that is the real news of the day.

As I get ready to close this week’s column, it is interesting that some sage words of my mentor come to mind. As I neared the finish of his four years of training, Roy said to me, “Max, above all I have taught you, remember this first rule.

Never, never get married to a price target or the direction in which you think the market should go. Let it tell you what is happening. Put your confidence in the chart, and then put your money where its mouth is.”

I have never forgotten that sublime, quietly spoken sentence. It has saves me many times when I was just so sure that the chart must be wrong!

My advice to you is the same. Until we see different, use sell-offs to be a buyer. Look for bargains in stocks you like and know something about. And buy long-term call LEAPS on the S&P or Dow and cash in even more. As long as the Super Chart says buy, let it tell us what to do. And above all, don’t blink!!

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