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In Uncategorized on August 31, 2009 at 2:38 pm

bull mktAUGUST 31st, 2009…This baby bull market may be in need of a breather.  Most stocks are trading above their 200 day average price, the bullish percent indicator is overbought, and most momentum indicators are diverging.  The Dow Theory buy signal that gave birth to this new bull was given on 23 July 2009.  This makes the baby bull a little over  a month old, and yet it is already looking a little tired.  Let’s not forget that the market has risen 50% off of its March 9th lows.  Jeff Saut of Raymond James has aptly stated that “maybe the energy expended to get to the buy signal is enough to warrant calling for a rest.”  Here’s a Point & Figure chart of the Dow Jones Industrial proxy (DIA):

DIA 31 aug 09

On a shorter term horizon, Chart 2 below shows the DIA making a new August high, however, the momentum indicator in dark green (14 day RSI) has failed to confirm the new high that it made at the beginning of August.  This means that things are going up, but at a slower pace than before (think about throwing your pen cap into the air — at the highest point, momentum stalls and then actually reverses).

DIA st 31aug09

September and October are usually volatile months (think 1987, 1998, 2001, 2008).  For this reason, I am recommending a cautious portfolio stance.  I’m recommending new equity purchases be held off until the momentum situation is resolved.  If this means missing more of a rally so be it.  I would rather be cautiously wrong footed than commit new capital at this altitude.

GOLD FORMING A BULLISH PENNANT….  The battle lines are being drawn in the gold market and it appears as if the bullish forces may win.  Usually pennant formations are continuation patterns.  This means the upward trend that has been in existence since the breakout at $450 may be close to resuming.  Notice the several attempts at breaking $1000 on Chart 3.  This is akin to mountain climbers making several assaults on the summit.  Each base camp is progressively higher and allows the market to gather strength for a new assault on the old highs.  We are beginning the fifth ascent towards $1000:

gld 31 aug 09

CONCLUSION: Maintain stops on all positions and take profit on trading positions.  The Dow could easily pullback to 8000-8250 over the next two months and still be in the confines of a BULL market.  Check our ETF Advisor page for current positions and email me for stop levels.