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Who Are the Clowns and Who Are the Jokers?


With the investor stuck in the middle, here's how to analyze the levels and chart a course of action.


Maturity, one discovers, has everything to do with the acceptance of not knowing.
Mark Z. Danielewski

Good to be home! My firm spent the last week in New York City, visiting clients and potential clients, and speaking at the MTA (Market Technician Association) Symposium on our 100-Year Market Theory. What a great experience having so many technicians in one place. It was truly an honor.

Needless to say, the common talk was a deliberation about the next leg in the markets. Another common question kept arising as well: Will Apple (AAPL) be the downfall of the Nasdaq and start something much larger? Many even debated whether or not to buy it, which seemed surprising considering its technical position (50% above its last technical breakout). For us, when evaluating the bigger picture, it doesn't really matter other than short-term trading. Hence, irrespective of the Apple hype, we turn our sights today to the S&P 500.

Since the break back below 1,400 on the S&P 500, two weeks ago, the market has regained some volatility akin to last October and November. But, considering the SPX is only 3% off the April 1 high, we'd hardly call it something to worry about – for now. The tape is, however, reminiscent of the song by Steelers Wheel, "Stuck in the Middle with You": Clowns to the left of me, jokers to the right, here I am, stuck in the middle with you. The only question remaining is: Who are the clowns and who are the jokers? Since investors want to be neither of these, it is crucial to analyze the levels and chart a course of action to prepare for all the possible what-ifs that may occur.

Over the past few weeks, since breaking the topside of the "2011 Channel of Indecision" on March 13 at SPX 1370, four key technical levels have come to the forefront (1340, 1370, 1420, and 1560). As for now we must take into consideration how far the first true correction of 2012 will be. We believe, based on the current technical condition, that it is not likely to be very deep, and based on probabilities of momentum, volume and technical pattern, the next likely support is a small floors and ceilings at 1,340. This would provide a decent 6% correction from the April 1 high. If this occurs without the slope of the 50-day moving average turning negative, it will be a healthy move, and our target of 1,550 to 1,560 will remain in force.

Click to enlarge

However, if 1340 is broken and the SPX heads into a deeper consolidation – say the 200 DMA at 1275 – it would require a larger technical pattern to still determine if 1550 remains the target. Since we don't predict, our conclusions and search for clarity can only be based on evidence. Another such piece of evidence is the high price action and money flow into defensive sectors like consumer staples, packaged foods, and big pharma and out of high-beta names previously mentioned.

For now it's earnings, politics, and again revisited, the PIIGS debt, which will continue to drive the tape. With the increase back into volatility due to earnings, the risk appetite may shift on a moment's notice. As such we won't pretend this is the new norm, but rather recognize that it only holds true for now and investors must react accordingly for the time being.

As always, we hope this helps.

Happy Earnings Season!

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News

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No positions in stocks mentioned.

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