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Flipping The Coin And The Road Ahead

10/12/12 01:37:24 PM
by Billy Williams

Events are under way that could create massive changes to the market, but if you understand what they are, then you'll know how to play them into the end of the year.

Security:   SPX, GREK
Position:   Buy

Big things are happening that could create a whole new dynamic to the stock market and the global economy, with October being a wild card during this time of transition. Why? October has historically been the month where the markets have crashed and has been referred to as the "jinx month" because of crashes in 1929 and 1987, the 554-point drop on October 27, 1997, back-to-back market massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008. But there are events taking place that make a crash unlikely this year, and set the stage for a massive runup going into the end of the year and give you the chance for big gains if you know how to play it.

First, the US Presidential election is under way, with two political opponents running for the highest office in the land, and they have diametrically opposed viewpoints on how to go about restarting the American economic engine. With so much at stake, it is unlikely that the current administration will do anything to endanger the soft job market or make any moves that would shock the stock market and cause a downward spiral. For that reason alone, if nothing else, a stock market crash is unlikely unless a black swan event appears out of nowhere like a war or terrorist attack. See Figures 1 and 2.

FIGURE 1: S&P 500. The SPX has suffered some distribution days, which is causing it to roll over and test support, but the bulls remain in control and institutional traders have a chance to run the market higher into the end of the year.
Graphic provided by:
Even Europe is showing signs of life, as exchange traded funds (ETFs) on some of the EU countries are beginning to trade higher, which could reveal that the EU is coming to terms with some of its debt problems and is taking serious measures to deal with it.

And while the market has pulled back recently, the bulls remain in control and are likely to make a run on the market after the election to drive price higher in order to lock in gains. Most fund managers are incentivized with performance bonuses for the money that they manage and will try to take the market higher in order to maximize that bonus. With so much money under management, this frenzy of buying typically causes the market to go higher.

But the market is at a crossroads, with distribution days mounting and making it difficult for the longs to gather the steam necessary to take the market higher. If the bulls can get the market over the Standard & Poor's 500's (SPX) price of September 14, 2012, then that should pave the way for the market to reach new annual highs, locking in their bonuses and helping the long positions lock in fat gains as the year closes out.

FIGURE 2: GREK. The Greek ETF (GREK) has been trending higher despite all of the negative press. Price could be revealing that the country, and the EU, have finally made a deal on how to cope with its massive debt problems. This could help the market go higher as 2012 comes to an end.
Graphic provided by:
As of this writing, the SPX is trading at support and what is needed is for support to hold so that price can work its way back up to the September 14, 2012, high, and trade up through it. Once that occurs, then the bulls are free to come out and trade alongside the institutional managers who are trying to drive the market higher.

Stock leadership will reside in the stocks that are trading at or near their all-time price high. With no overhead resistance, these stocks have the best chance for above-average performance on a historical basis, but the underlying fundamental criteria should be in place during the selection process.

If the market moves fast, you can gain a secondary entry points alongside any pullbacks to the 50-day simple moving average (SMA), within 5% of its buy point on a breakout, and/or off a secondary base pattern formation. Any of these setup conditions can be used for a second chance to capture the bull run into year-end, or used to add to a position and pyramid up as price climbs higher.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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