Channeling Stock Market Bracing for Dizzying Melt-Up? ~ The Risk Averse Alert

Thursday, April 03, 2008

Channeling Stock Market Bracing for Dizzying Melt-Up?


Today's lower start resulted in the sort of RSI divergence that puts a floor under a decline. The S&P 100's subsequent rise took RSI to the upper end of its declining trend of the past three days. Then, the final hour's mild sell-off raised a red flag.


OEX 5-min

Best case it could simply be the S&P 100 will fluctuate in the range of the past two days. Then, we might expect a rise to the 650 area to complete this week's advance from 610.

Alternatively, there's reason to entertain the possibility much of Tuesday's (4/1) monster advance will sooner be given back than find the S&P 100 following through to 650. You get the picture of this via the markup drawn on the OEX chart below.


$OEX

There's something about how the S&P 100 has been trading since topping yesterday that brings me to look back at action following last Monday's (3/24) top. This top, too, soon followed a monster, moon shot higher. Are we once again about to see another period where the stock market slowly drifts lower? Or, more generally, might the S&P 100 remain relatively confined over the next couple weeks by the channel defining the range it has traded over the past couple weeks?

I am likewise curious about those two instances late last year (circled above) when RSI dipped below 50 (demonstrating sell-side strength) ... and diverged as the S&P 100 temporarily bottomed ... then, as the S&P 100 recovered some of its prior losses, subsequently rose above 50 ... only to peak and fall lower in harmony with the S&P 100. Is a repeat performance possible?

Absolutely.

Do I think it is likely?

Right now, no. If I could pick a number out of the sky, I'd say there is about a 60% chance Monday, March 17th marks the bottom of the S&P 100's multi-month decline. However, take this in the context of my belief there's a 90% probability the stock market will melt-up sometime during the months ahead. In other words, I am not positively certain the stock market has bottomed. Contrarily, I am utterly convinced the stock market will soon embark on a huge rally and leave last October's peak in the dust.

On Tuesday (3/25) I wondered, "... might [the S&P 100] fail to fall below last Monday's (3/17) intra-day low before exploding higher?" and opined, "[t]he longer-term view of the S&P 100 suggests this is possible." You can go back and look again at the S&P 100 chart that shows why, today, I suppose there's a 60% probability March 17th's low will hold.

Then, on Wednesday (3/26) I wrote, "The more I look at the big picture — the nearness to which all major indexes are to points at which, were they to fall below, the stock market might likely thereafter collapse spectacularly — the more I am persuaded last week's low [(i.e Monday 3/17)] represents something of a strong floor." This is to say that, should the S&P 100 sink below its intra-day low on March 17th, it probably will not fall much beyond it. So, that's a little qualification on the 40% probability of it happening at all.

Maybe you are thinking my analysis is moving all over the board? The discussion I am raising today is unlike anything I have mentioned over the past several days.

Well, this simply is the nature of the game. Nothing is set in stone, really. This is particularly true regarding probabilities over a short time frame.

Be that as it may, there's no harm entertaining different possibilities. Today's last hour of trading, by my analytical methodology, simply gives rise to the need.


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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.


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