Economics explains “why,” but T/A (technical analysis) tells you “where and when” – and how to cash in.
Why is the market so damned flat?
It sounds like a complaint – the whine of a trader desperately looking for some momentum, a trend in most any direction. But it is really a pretty serious question, perhaps even the second-best question a body could ask these days.
The Blue Chip stocks of the S&P 100 have run between 410 and 440 for the past 34 trading days, a trance-like oscillation that could lull the most active trader into a coma-like stupor. (And that’s a damned shame, because anyone who succumbs to the temptation to nap right about now will not ask the best question, and will miss the best opportunities.)
Certain wags in search of easy answers have credited this stalemate to NYC floor traders making early exits to the Hamptons. Others claim that the news is simply so balanced right now that there is no reason to buy or sell stocks.
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Forget About Why: We Just Want to Know When
That there is a state of equilibrium of sorts is self-evident – and somewhat laughable. The real question, indeed the best questions are: “When is this misery going to end?” and “Where will the market go from there?” And for those answers we have to look to history and Technical Analysis.
Let’s start by establishing some technical context. Here is my master chart for the S&P 100 (OEX). Regular readers of this column will recognize it as an unerring guide for determining whether the markets are in bull or bear mode. It can also be used to establish the probable parameters of short and mid-term oscillations within the Blue Chips’ long-term trend.
One can argue till the cows come home as to why a trend comes to an end. I personally believe it results from excess credit toxicity. Others believe that it stems from a shortage of cash. Be that as it may, most folks just want a heads up as to when it has ended. And for that, this system is superlative.
The Three Sure Signs
In this second chart, I have marked out three clear signs that the Clinton Era boom was coming to an end:
- On the lower charts, we see a general overbought situation on the Moving Average Convergence Divergence (MACD) oscillator. Suddenly the fast average gaps down and away from the slow average…
- Momentum shifts dramatically to the negative…
- On the upper chart, the 7-Month Exponential Moving Average (EMA) crosses under the 13-Month EMA.
The inevitable result: a two-year, 55% collapse.
The Critical Difference
Again, we could credit this collapse to all sorts of historical causes. Overvalued tech stocks and/or 9/11 come up all the time as reasons/excuses. T/A doesn’t claim to know the “whys or wherefores.” But it is damned good at sorting out “what comes next.”
For example, back in March 2002, a six-month mid-term uptrend had most every analyst all hot and bothered: “The crash is over! Time to buy stocks.” Heck, we even heard the ever-so familiar “V-Shaped Bottom” get tossed about.
But the Master Chart shows that this is a false hope. Wise traders who knew how to read the signs dodged a 36% loss by waiting until June of 2003 when all three of our signals had reversed themselves.
Perfectly Positioned
Those traders thoroughly enjoyed the fruits of an 84% rally. They also slept well at night knowing that they would have clear notice of the end.
And indeed, come January 2008, they did not need to read any of the long arguments as to whether or not the trend had really changed. They saw the exact same signals that preceded and confirmed the 2000 crash, and were able to move to cash (or better yet, to put options!).
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Hearing History’s Quiet Rhyme
Now once again, we see the talking heads arguing about stimulus packages and V-shaped bottoms. And yet stocks are at a standstill.
And indeed, when we look to the Master Chart, we do not see a complete set of rally signals similar to those of June 2003. Rather, we see the same setup as April 2002’s false “bear rally.” By acting with caution at this moment, you will be able to stand clear of an additional 40% loss. Or better yet, you could choose to buy puts and rack up triple-digit gains throughout the next few months.
Justice and I have explained at length as to the economic troubles overhanging this market. But in the end, that is all just theory until it is proven out by actual historic results. Now we don’t doubt that it will be proven, but isn’t it cool to know for a fact what was going on?
Just look to the charts my friends, and act accordingly.
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Request: The charts both in this article and in your WOW newsletter are almost all fuzzy and hard to read, even when enlarged. Can you find a better graphics software that will make them clearer? Thanks