On a long term basis the market is still very much in an up trend based on the four factors I pointed out in last week's post. As I also pointed out last week there will be several weeks where little comment is necessary on the long term signals since they are so infrequent. Therefore, for the most part the weekly updates will be focused on identifying high probability intermediate term market corrections.
The tools that I use for this purpose are the weekly SPY chart with a 40 week moving average (see attached). I also use the same sentiment indicator (not shown on chart) that I use for determining the longer term signals. As of the close of this past week my analysis points to a high probability of a market correction with potential support targets of 157.52 (October 2007 high) with a potential for the market to drop all the way to the 40 week moving average (white line) at 149.65. Following is the analysis:
1) The market is trading at a level above the 40 week moving average which is historically related to significant market corrections.
2) If any of you are familiar with japanese candlestick analysis; last week was a doji bar which closed lower and this week closed lower with a bearish engulfing bar.
3) Sentiment (not shown) is rising from historically low levels.
If one is fully invested in mutual funds in a 401-K or IRA, there are two things you may want to consider. 1) Based on your risk tolerance move a desired percentage into cash. 2) Consider hedging your position with put options. In next week's post I'll start getting into more detail about basic hedge techniques that can be used to allow one to stay fully invested during longer term up trends while significantly reducing the portfolio drawdown during intermediate term market corrections. Have a great weekend!
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