Saturday, November 14, 2009

Market summary and outlook as we approach November Options expiration week

Friday the 13th turned out to be an important day after all in the stock market. It turns out that the Dow broke up above the downtrend line today as seen in the 3 year chart of the Dow above. While it is not a decisive move, it nevertheless was significant on the face of it. The only data missing to make this move up more profound was the Volume data. You see with the market move up this past week, Volume was down unfortunately. So this move above the downtrend line may be short lived. Yo can see this drop in Volume by looking at the 6 month chart of the Dow also posted above.

The S&P 500 barely closed over its upper resistance level of 1090 and closed at 1093. Next weeks action is important for several reasons. First, next Friday is November Options expiration. And secondly, if we truly have broken the 3 years downtrend line next week will determine whether there will be a follow through above the line or not. If we drop below the line and fail to stay above it, then the Bears may seize control of the next major move. Watch Volume too for helping to decipher the true bent of the market. It should be interesting to watch daily because I do not believe it will sustain itself and stay above the 3 year downtrend line.

I have also added a chart of the Put to Call ratio from 1/2/08 to the close on Friday. It will give you some sense of where we are versus where we have been with this indicator. I have also shown with red lines where I said back in August when we hit a 2 year low of 0.59 on this ratio that it was a time to start to unload heavy positions, take profits off the table and get ready for a correction. Since that time the index has a trajectory of up but the Dow has gained an additional 7.6% to the close Friday. For those who ignored my calls to start selling and taking profits off the table back then, congratulations, you made an extra 7.6% gain.

I have one other piece of data which convinces me we are not going to stay above the 3 year Dow downtrend line and that is the Nikkei 225 Index. You can see from the chart below that we have a similar pattern as the Dow over this 5 year chart, but the Nikkei has not broken above its downtrend line. Because of this I believe that the Dow will slip back below the resistance line next week.

I will make one additional point here for my own defense, I had warned many to get out of the Nasdaq when it too was climbing that steep climb in the year 2000 to a peak of 5,000. I sent the alarm at a Nasdaq level of 4,000-4,200 to take profits off the table as back then the Put to Call suggested a major change in direction was ahead of us. Those who ignored my words back then made an additional 20-25%. But then the market plummeted to 2,500 and those who continued to hold lost 50% of their holdings. My point is no one, especially me, can time the market. But I would rather be a bit more conservative than taking imprudent risks. Good luck in whatever you feel comfortable with and may the force be with you. :)

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