Monday, January 24, 2011

The Daily Note - Warning! Avalanche Danger!

Once again I find myself at odds with the euphoric outlook.  Last year I saw the possibilities both ways, and my high prediction of the Dow 11800 was on the final horizon at the end of the year. This time I see "Warning! Avalanche Danger"  signs instead of many more highs.

I tend to question myself all the time but I also tend to stick with my vision. Why? Because most of the time my first impression is the most accurate.  That does not mean that I don't ride the direction of the market, it just means I carry a healthy amount of pessimism to hedge myself. So this is what I spoke about in my room today; this is what I see.

The leaders are not leading. Sure today AAPL reversed nearly 10 points but it's the 50% retrace from a 20 point 3 day drop. GOOG (no one saw it coming but me? ) $320 low then some add on bonus to $311 last Friday not to mention another 10 point drop this morning does not make the reversal such a great achievement. Sure you can say it's because the changing of the  heads of both of those companies created an uncertainty, but I ask you do you really believe those companies will go under that quickly? Last week and this morning is revealing a panic like selling. Post earnings drops on good earnings are not the norm and neither are the long candles they create. They're not alone: PCLN CMG NFLX AMZN POT are a few more to keep as a reminder.

What looks good on the Dow, Nasdaq, SPX  were not really the leaders they were the followers they were the basket of the rest in  the Nasdaq 100 the SPX100 most are the stabilizers.  You could say that it's good for the pause to let the rest catch up and I agree and that it's healthy for leaders to pull back and regroup and I agree again. Yet what is troubling is the frenzy with which these changes occur creating fast and vicious drops.

Today the DJIA closed at 11980.  The initial part of this bull market started in March 2009 rising 4000 points in 10 months. The last time we took a pause was a thousand points ago which was last April. Although we have slowed the rise since that recovery, we still need to look at the fact that this last nearly 2000 points were achieved in the last 4 months from that minor correction. Compare that to the 1996-2000 stellar rise of 6568 points from a low of 5182 to 11750 which took 4 years and most of  which we gave back to 7197 low in a modest 2 years.  Then consider that it is stellar especially because it took 5 years almost to the day to recover 7001 points from Oct.10, 2002 low of 7197 to the all time high of 14198 on Oct. 11, 2007.  The avalanche off that high, we can all recall because the Dow gave it all back and then some in just 18 months to a low of 6470.

Are you beginning to see the picture? Will we hit a higher high just to get to a lower low?   The 11980 and higher will meet with major resistance points until it tops 12800, 13100 and tests the all time high.

Of course, the best way to survive an avalanche is not to be caught in one. Otherwise you have only a few options:   Swim with the flow works but so does a lifeline and luck plays a large role. As with trading, the deeper you're buried, the less chance you have, hence swimming keeps you nearer to the top. A lifeline and beacon, can keep you from total disaster, so stops can be very handy. Of course once you are buried, you're at the mercy of others for rescue and that takes time so keep your air pocket stable and remain calm.  Moral of this story: Be aware of where you are and be in control. As in skiing dangerous terrain, have a plan and know how to survive the trading avalanche.

Happy Trading, Living, Dancing and Skiing

The Daily Pick - $DJIA

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