S&P 500 (SPX) & Nasdaq 100 (NDX) Timing
S&P 500 Index (SPX) Chart Analysis
Last week we wrote:
"...The S&P 500 Index - SPX broke out this week and it did so with a great deal of strength; a powerhouse rally on Monday, followed by three days of consolidation and then another huge rally on Friday to end the week at its highs. This was what we were looking for and it should be the start of an entirely new advance. The below chart shows the first resistance level at SPX 1488. We are close enough to it to say that this level will be Monday's battle line."
This week:
Last week's break out to new rally highs for the S&P 500 Index - SPX was followed by continued strength this week and a close above the first resistance level, at SPX 1488, that we were looking for.
This is a hugely bullish indicator for the coming months, however looking at the short term we are expecting some profit taking to begin soon.
A look at the below chart shows several lines of resistance all in close proximity. The SPX 1488 resistance has been surpassed, but just ahead are the all time highs, at SPX 1527, that were attained all the way back in early 2000.
This level alone should spark some profit taking, not to mention it is right at another resistance level, at SPX 1522.
The Nasdaq 100 Index -NDX (and Nasdaq Composite Index) are also right at strong resistance levels as of Friday's close (see below analysis) which adds more credence to an imminent pull-back.
This does not mean it is time to sell.
First, we could just as easily take off to higher highs from here and blow right past these levels. Second, profit taking is normal and should be expected as a healthy part of any bull rally.
After the selling has subsided, the new cash on the sidelines will just add more fuel to a continued advance.
Again higher weekly highs, higher weekly lows and a higher weekly close, with another close well into new rally territory, are very bullish. We are looking for continued higher highs but with short-term profit taking likely in coming days.
Support for this advance is now at SPX 1431 and then SPX 1415.
We are in a BULLISH position in the SPX, using the Rydex Nova Fund (RYNVX) or other bullish S&P 500 index fund.
Nasdaq 100 Index (NDX) Chart Analysis
Last week we wrote:
"...The Nasdaq Composite Index and Nasdaq 100 Index - NDX which we track here had a huge week, closing above the fib 78.6% retracement / resistance level on Monday and then, after three days of consolidation, another rally Friday that pushed intra-day prices into new rally territory."
This week:
On Monday the Nasdaq 100 Index - NDX broke out to new rally highs and have thus confirmed this advance. The following three days had substantial gains and we closed the week at NDX 1891.06, above the initial resistance level at NDX 1889.69.
Obviously a very bullish outlook for the entire stock market has now been confirmed with both major indexes, not to mention most all the other stock index, at new rally highs.
Not to spoil the party, but a reminder is due here that while the Dow is at new all-time highs and the SPX is a fraction away from new all-time highs, the NDX is still some 2,800 points away, or 148% from new all-time highs. Such was the effect of the 80% bear market loss in this index.
Regardless, we are bullish and there is every chance that this may very well be the start of a new bull move lasting months.
As discussed in the SPX analysis above, we are looking for some profit taking to start soon. Both indexes are at strong resistance levels and if we do not see some corrective activity here, it will just be worse when we do see it in the future.
As this position was already bullish, no changes are needed. Support is now at NDX 1803 and then NDX 1781.
The NDX portion of this strategy remains in a bullish position in the Rydex OTC Fund - RYOCX, (or other bullish OTC index fund).
The Compulsive Impulsive Trader
The Stereotype
We are all familiar with the stereotype of the "compulsive trader." Traders who are compulsively looking for trading thrills, while telling themselves they are doing it to make a profit.
The rush of adrenalin that comes from making the "big" trade and then watching to see if it is followed by a "big" win.
It is not so different from betting at the race track.
It is far removed from what is required for successful market timing.
Compulsive impulsive market timers take trades because of emotional responses to news events, market rallies, or market sell offs, because they "feel" they know what is going to happen next in the markets.
They take trades not because the trade is required, but for the thrill of the trade itself. All risk controls are ignored, no logical trading strategy is followed, and no exit strategy is prepared ahead of time.
Of course anyone can act impulsively at times. But in the investing world, impulsive trades are almost always losing trades. And compulsive impulsive trading, can lead to outright ruin.
Delaying Gratification
An interesting test was run to measure a person's impulsive tendencies:
Participants were asked to decide between taking an immediate, small monetary reward (that is, $100 right now) or a larger reward given later, $500 in six months.
Impulsive people tended to take the smaller, immediate reward. They have difficulty delaying gratification. They can't wait for the larger reward. They want what they can get as soon as possible.
Even disciplined people can act impulsively when the conditions are right.
There is little harm in impulsively going for a latte instead of your usual morning coffee, black with two equals.
Yet while some impulsive decisions may have little effect on one's life, impulsive decisions when trading the stock market can have major negative consequences.
Compulsively Impulsive
Trading (market timing) requires that investors clamp down on emotional impulsive behavior. Market timing is possibly "the" perfect example of unemotional, non-compulsive and non-impulsive planning. Timers look far ahead in time, planning for gains that may not be realized for months. If in cash during a bear market, actual profits may be postponed years.
Instant gratification is the exact opposite of what market timers must expect. Those who think that long term buy-and-hold investors hold the edge in long term planning are not correct. It is market timers, following a plan that takes years to unfold but offering gains far in excess of a simple buy-and-hold, who have the real long term strategy.
Conclusion
Compulsive traders will have great difficulty being successful (profitable) market timers. Market timing is the non-compulsive execution of a planned strategy, that can only be successful over time.
Impulsive traders will have great difficulty being successful (profitable) market timers. Market timing requires adherence to a trading strategy that requires trading not when you feel the urge, but only at specific points in time when your trading strategy tells you to do so.
Compulsive impulsive personalities face many difficulties. But in investing, be sure to hold those impulses at bay if you want to successfully beat the markets.
Correction Ahead
April 27, 2007
The stock market, and specifically the S&P 500 Index (SPX) are nearing levels where a correction should not only be watched for, but counted on. Traders using the S&P Deposit Receipts (AMEX: SPY) to follow this index should be watching both SPY $151.83 and SPY $153.56. Note these are only 1.5% to 2.6% from Thursday’s close.
In last Friday’s Alert titled “Damn The Torpedoes, Full Speed Ahead,” we were looking for a rally. We have had the rally in spades and traders need to recognize that for every rally there is a correction.
Consider what the SPY will be dealing with just ahead, with strong resistance at SPY $151.83 (based on Fib support-resistance levels) and then the prior March 24, 2000 closing market highs at $153.56. A correction could start at any time between current levels (that means tomorrow) and these stated resistance levels.
Short-term traders beware. Investors and market timers do not be concerned, as there will be higher highs after the correction.
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