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We had a lot of new people join the site earlier this month and
I've been getting lots of emails and questions from them. One thing that
stands out though is a lot of people asking about news items. For instance
going into last week I had someone email and ask about the earnings for
airline stocks. They wanted to know if they should buy or sell because of the
earnings. How to game the news so to speak.
This is
something I do not do at all. I don't base buying decisions based on news items
and certainly not ahead of them. Usually if you react to a news item the news
has already been priced in by the market so you are putting yourself way
behind the curve. As far as trying to game the news I simply can't predict
what an earnings report is going to be or what the economic news is going to
be either. All I do is figure out what the trend is and try to ride that
trend for as long as possible - and do my best to realize when it changes.
If you
watch CNBC or read the financial press though you get bombarded by news and
opinions. It can prevent you from sticking with the trends by putting
unnecessary fear into you. For instance a lot of attention is put on the
employment numbers. Going into employment numbers the reporters will say the
market is waiting on the numbers and if they are bad it might dump. They say
something like that so you get scared to act. Then the news is bad and the
market goes up anyway.
The
important thing is always the trend of the market. Not the news. News can be
bad and the market can go up nonetheless.
We are
through the first big week of earnings reports from corporate American and
over half of the companies that have reported so far have missed their
earnings estimates. 50 of the 92 companies in the S&P 500 that have reported
have missed, while many of these companies have refused to give earnings
forecasts for the rest of the year.
56% of
the companies that have reported have shown a drop in sales from a year ago. This
is the sixth quarter in a row that earnings have shrunk - a run of quarters
not seen since 1951.
If that
news isn't bad for you how about this. On Friday the government is going to
release 4th quarter GDP numbers. They are expected to post a decline of 5.2%.
That would be the worst quarter for the US economy since 1982.
Well with
all of this bad news you would think the stock market would be in total
collapse, but it isn't.
You see
the market has already been dropping into all of this bad news. It fell over
10% from its January high in just the space of a few weeks.
Last week
the S&P 500 held the 800 level and bounced of it on Friday. Earlier this
month I had been looking for the market to fall below this level and bottom
nears its November lows - but last week's strength suggests that it might be
bottoming right here. If that's the case then everyone who has been selling
because the news is bad is going to be left behind when the next rally really
gets going.
It all
has to do with the trend of the market. The easiest way to identify a trend
is to see if the market is making higher highs and higher lows. If so then
you have an uptrend in progress. Now if you have lower highs and lower lows
in progress then you have a downtrend going. I talked about this last year in
a video I put together about using this type of trend analysis to figure out
where to place stop loss orders. You can watch it here.
It also
helps to see what is happening in multiple time frames to keep your mind not
only on the big picture, but what is happening right now too.
Let's
break down the broad market and see what is happening.
For over
a year now the stock market has consistently been making lower highs and
lower lows on daily, weekly, and monthly charts - the textbook definition of
an overall downtrend. In fact it has been a brutal bear market.
The last
lower low was made in November. After that low the market rallied into the
beginning of January and then made a peak. It has since fallen to the 800
S&P 500 level. If 800 marks a bottom then the market will have made a
higher low - which is a sign the trend may be changing. The odds would then
favor the market going through its most recent high January high to make a
higher high.
That
would not necessarily mean a new bull market is in order, but would suggest
the trend for at least the first half of this year would be up - we should
expect a rally up to the S&P 500's 150 and 200-day moving averages.
Now will
800 hold? Let's look at the short-term chart and apply this type of analysis
to it:
For the
past few days the S&P 500 has been locked into a trading range of
840-804. I believe that its move out of this range will define its next big
move. So if the S&P 500 were to close below 804 I would take that as a
sign that a retest of the November lows is likely, while if it closes above
840 I would take that to mean that the short-term downtrend that has been in
place since the beginning of January is over.
After 840
the next resistance point is around 860 - this is the point of the S&P
500's last peak on its hourly chart made on the 15th and represents a 1/3
retracement level of the January high and 804 low. If that gets taken out
then I would take that as confirmation that the market is now in an uptrend
on the hourly chart - one that would also turn into an uptrend on the daily
chart.
The daily
stochastics for the S&P 500 - and the DOW and Nasdaq for that matter -
are oversold. The S&P 500 has held the 800 level in the face of some very
bad news the past few days and has based on its hourly chart. If it closes
above the 840 level it will cause the daily stochastics to give a buy signal.
To sum up
if the market does not break 800 in the next two sessions I expect it to
rally and turn up. The daily stochastic would generate a buy signal. I would
also expect such a rally to fully go through the 950 level on the S&P
500.
As for
positions I like...
The above
is a transcript of a WSW Power Investor Premium article. To access the rest of
the article go here.
Mike Swanson
Editor,
Wall Street Window
Disclaimer:
Michael Swanson is the President of USA Capital, Inc., which provides
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