You Need to Sit Tight

By L.A. Little  JUL 27, 2012 2:05 PM

Technicals say stay in the trade while remaining alert to impending danger.


MINYANVILLE ORIGINAL Famed investor/trader Jesse Livermore once said that it was his “sitting tight… that made him the most money.” It’s not easy to sit tight. It’s doubly difficult when you have excellent profits and the general market is wavering in a less than stellar earnings season laced with continuing world concerns. I mean, seriously, sitting tight through all these worries is worse than being tied to a stake, smeared with honey, and subjected to an attack by Texas fire ants. It’s not easy. So should you be sitting tight?
If you are a trader or an investor whose time frame is more than a couple weeks, then you need to be sitting tight. There’s nothing in the charts telling you to bail just yet. There are definitely some technical problems like the Russell 2000 (^RUT) now trying to lead the markets lower when a month ago it was leading them higher and the Nasdaq 100 (^NDX), which no longer has Apple as its lead dog and lags as a result. There are not only fundamental issues, but some technical ones as well.  However, there remains technical strength that has yet to be broken. To illustrate these points, look at the SPDR S&P 500 (SPY) across the three time frames, which is illustrated here in the Trading Cube.

The long term remains bullish and short term has turned bullish as well. What remains a concern is the intermediate term, which is discussed below because that will be the tell for this market.
But before jumping to that, let’s look at the long term. On the SPY, it is suspected to be bullish while on the actual index ($SPX) it is confirmed bullish. You simply can’t pull the plug on long-term long positions until the long-term trend appears to be in jeopardy and that isn’t the case -- at least not yet.

In fact, when you look at a long-term chart, there is a real possibility of a breakout above the 2008 highs when looking at adjusted data as shown in this chart (adjusted for dividends). It’s only 60 S&P points away!
On this time frame, there is a clear dividing line between bulls and bears with the resistance and support zones as the demarcation. The only thing that is bad about this chart is that the trend probability failure rate is beginning to stretch. It is currently at 60% and about to turn to 72%. What that says is that there is currently a 60% chance that this trend will fail on this bar and next month it jumps to 72%. For the trend to break, however, price would need to trade below $105.74 and that is going to take a few bars. Thus, we are getting long in the tooth on this trend.
Others would say that volume has been too light as well and we should fail. Folks, you can’t talk about volume in the context of “average volume” and believe it to have value. Volume matters at anchored resistance and support as well as at swing points and that hasn’t been bad -- so forget all this nonsense you hear about light volume. It means nothing the way those investors are computing and using it!

So with the long term becoming extended in terms of time, what form might a failure take? Clearly you don’t want to wait 300 S&P points to decide that the bull market is over. Fortunately you don’t need to just as you don’t need to be scared out of your positions in all this short-term chop and worry.
Here is the intermediate-term trend and this is the time frame that you almost always want to monitor for it typically holds the keys to a continued bull market move (breakout) or an ensuing bear market (breakdown).

I have annotated this graph with several key informational items. You can see the key swing points, the anchored resistance zone, and three anchored support zones. The highest one continues to be tested, and so far, it has held.
What is critical in this chart for the bulls and the bears alike is both the resistance zone at the top of the chart and the middle support zone. If the resistance zone breaks and price pushes higher, we could see yet another leg up in this market as hard as that might be to imagine. It isn’t as far reaching of an idea that most seem to suggest. It isn’t clear yet that it will happen but it is clear that if price does push up there, it will be hard to stop the momentum that likely comes with it as there are so many traders and investors poorly positioned for a topside breakout right now.
On the flip side, there is the area on the chart where you see the two swing point lows (or SPL) that are collated in the same area as the middle support zone. They hold the key to the fate of this market from a bearish perspective for a break of that area would most likely result in multiple swing points breaking on multiple time frames. I would be very surprised if that didn’t result in a flush to the downside. In fact, a break of that area would most likely end the bull market that began to set up back in March 2009. As it stands today, that is the critical area if you are bullish and it’s about 100 points lower as of today.

When I look at these charts, what I see is a huge battle taking place where the stakes are very high and it is narrowed down to about a 65 point S&P range. If the bears lose the battle then “sitting tight” will have been well worth the effort. If the bulls yell first, then you will still have plenty of time to do some protecting or culling of your weaker portfolio holdings rather than sitting and waiting. A break of multiple swing points on the intermediate-term chart would call for additional action as that would be the signal that the bull market has probably run its course.
There’s my roadmap for the short-, intermediate-, and long-term outlooks. They are intertwined as usual.  As also typically happens, they provide you with the decision points needed to stay in your trades while remaining alert to impending danger. In this way, you can “sit tight” without relying on a flip of the coin or a lot of hope.

Twitter: @tatoday
No positions in stocks mentioned.