Wall Street Window
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, Jan 26 2009 08:46 AM
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Posted 26 January 2009 - 08:46 AM
How to React to the BadMarket News - Mike Swanson (01/26/09)
by Mike Swanson Mon, 2009-01-26 08:44.[/list]
We had a lot of new people join the site earlier this month and I'vebeen getting lots of emails and questions from them. One thing thatstands out though is a lot of people asking about news items. Forinstance going into last week I had someone email and ask about theearnings for airline stocks. They wanted to know if they should buy orsell 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 decisionsbased on news items and certainly not ahead of them. Usually if youreact to a news item the news has already been priced in by the marketso you are putting yourself way behind the curve. As far as trying togame the news I simply can't predict what an earnings report is goingto be or what the economic news is going to be either. All I do isfigure out what the trend is and try to ride that trend for as long aspossible - and do my best to realize when it changes.
If you watch CNBC or read the financial press though you getbombarded by news and opinions. It can prevent you from sticking withthe trends by putting unnecessary fear into you. For instance a lot ofattention is put on the employment numbers. Going into employmentnumbers the reporters will say the market is waiting on the numbers andif they are bad it might dump. They say something like that so you getscared 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 corporateAmerican and over half of the companies that have reported so far havemissed their earnings estimates. 50 of the 92 companies in the S&P500 that have reported have missed, while many of these companies haverefused to give earnings forecasts for the rest of the year.
56% of the companies that have reported have shown a drop in salesfrom a year ago. This is the sixth quarter in a row that earnings haveshrunk - a run of quarters not seen since 1951.
If that news isn't bad for you how about this. On Friday thegovernment is going to release 4th quarter GDP numbers. They areexpected to post a decline of 5.2%. That would be the worst quarter forthe US economy since 1982.
Well with all of this bad news you would think the stock marketwould be in total collapse, but it isn't.
You see the market has already been dropping into all of this badnews. It fell over 10% from its January high in just the space of a fewweeks.
Last week the S&P 500 held the 800 level and bounced of it onFriday. Earlier this month I had been looking for the market to fallbelow this level and bottom nears its November lows - but last week'sstrength suggests that it might be bottoming right here. If that's thecase then everyone who has been selling because the news is bad isgoing 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 toidentify a trend is to see if the market is making higher highs andhigher lows. If so then you have an uptrend in progress. Now if youhave lower highs and lower lows in progress then you have a downtrendgoing. I talked about this last year in a video I put together aboutusing this type of trend analysis to figure out where to place stoploss orders. You can watch it
It also helps to see what is happening in multiple time frames tokeep your mind not only on the big picture, but what is happening rightnow too.
Let's break down the broad market and see what is happening.
For over a year now the stock market has consistently been makinglower highs and lower lows on daily, weekly, and monthly charts - thetextbook definition of an overall downtrend. In fact it has been abrutal bear market.
The last lower low was made in November. After that low the marketrallied into the beginning of January and then made a peak. It hassince fallen to the 800 S&P 500 level. If 800 marks a bottom thenthe market will have made a higher low - which is a sign the trend maybe changing. The odds would then favor the market going through itsmost recent high January high to make a higher high.
That would not necessarily mean a new bull market is in order, butwould suggest the trend for at least the first half of this year wouldbe up - we should expect a rally up to the S&P 500's 150 and200-day moving averages.
Now will 800 hold? Let's look at the short-term chart and apply thistype of analysis to it:
For the past few days the S&P 500 has been locked into a tradingrange of 840-804. I believe that its move out of this range will defineits next big move. So if the S&P 500 were to close below 804 Iwould 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 theshort-term downtrend that has been in place since the beginning ofJanuary is over.
After 840 the next resistance point is around 860 - this is thepoint of the S&P 500's last peak on its hourly chart made on the15th and represents a 1/3 retracement level of the January high and 804low. If that gets taken out then I would take that as confirmation thatthe market is now in an uptrend on the hourly chart - one that wouldalso turn into an uptrend on the daily chart.
The daily stochastics for the S&P 500 - and the DOW and Nasdaqfor that matter - are oversold. The S&P 500 has held the 800 levelin the face of some very bad news the past few days and has based onits hourly chart. If it closes above the 840 level it will cause thedaily stochastics to give a buy signal.
To sum up if the market does not break 800 in the next two sessionsI expect it to rally and turn up. The daily stochastic would generate abuy signal. I would also expect such a rally to fully go through the950 level on the S&P 500.
As for positions I like...
The above is a transcript of a WSW Power Investor Premium article. Toaccess the rest of the article go
