Sunday, May 10, 2009

Feeling Lonely

As I read through all of the commentary on the many sites that I visit on a daily basis, the overwhelming consensus seems to be that we are approaching the end of a bear market rally. Apparently, I am in a small minority among traders. As I stated on Friday there are a number of strong arguments against this rally. However, I want you to look at the chart above and consider that the McClellan Summation Index is showing the greatest surge in its history. The ratio adjusted index also shows a similar pattern. Compare the current move in the Summation Index with the one in 2003. Tom McClellan correctly surmised in 2003 that a rally lasting at least 18 to 24 months would follow based on the surge in the Summation Index then, and I am saying that based on the current surge, we should see a rally lasting to at least June 2010.

This does not mean that all of the macro and fundamental arguments are wrong, but unfortunately, even though the rate and depth of decline from October 2007 to March 2009 was one of the most severe in the past 100 years, it was not enough to completely shakeout the buy and hold investor, nor enough to convince young investors that the buy and hold philosophy is flawed. We also have to recognize the historic shift in public sentiment brought about by the election of Barack Obama and the incredible boost in optimism and hope that he has brought to a broad segment of the population. That coupled with the most agressive government intervention in the markets ever should not be lightly dismissed.

Don't get me wrong. My ultimate targets for the Dow are 2747 (1987 high) and below 1000, but those targets are years away from now. For the moment we should respect the trend and trade it accordingly.

I expect a volatile week ahead followed by another breakout that should break the backs of the stock market shorts. Oil and natural gas may consolidate but will go higher. The UNG saw the greatest weekly trading volume since its inception with a gain of almost 23%. This alone argues for higher prices. Gold could still go either way, but it looks like a retest of the highs is in store. Perhaps we are in the process of developing a very large triangle in gold that will take many more months to complete, or possibly we are in wave b of a second wave, with a huge surge in gold to follow the completion of wave c. Right now it's up in the air. The only thing to do is trade the swings until the trend shows itself.
If the market begins to break down, we will know it soon enough. Just don't get whipsawed out of this trend.

No comments: