Two Topping Signs I’ll Be Watching For

  • December 15, 2004
  • Mark Melin

Tuesday Recap: We had a great
day yesterday with a profit of $175, our fourth profitable day in a row.  You
will recall that yesterday morning I was watching for a break above the recent
highs at 10640 level.  In fact, the Dow started the day lower, but then
predictably found legs after the Fed announced a (surprise!) ¼% rate hike,
ending the day at 10676, up some 38 points. 


You’ll recall that on December 6 I expected bond prices to move to the A level
on the chart.  As you can see from the exact chart with notations that was
posted on Dec. 6, that has occurred.  Further, on Dec. 6 I predicted that after
we tested this region we could see another leg down.  That might still occur,
and I’m starting to see signs pointing in that direction.  One interesting
market sector to watch is consumer staples.  Usually before interest rates start
to rise, consumer staples catch a bid.  Consumer staples have been strong for
the past month, and I expect that this will continue into 2005.  I don’t think
the move higher in rates is so much due to economic strength as it is due to
artificially low rates.  As a matter of fact, the yield curve is looking
ominously flat.


Prediction for Wednesday: We could touch both sides of the flat
line Wednesday.  I think we test the 10700 level on Wednesday or Thursday. 
However, at some point I wouldn’t be surprised to see a test of support, first
near 10640, then again 10600.  Ultimately, however, I think we finish the week
strong with a potential test of 10750. 


Longer Term Outlook:  When
technology breaks and the consumer staples start to lead the market, it doesn’t
paint a pretty future picture for bulls.  Further, a flat yield curve isn’t
exactly comforting long term.  However, having painted a bleak picture I don’t
think it’s going to get ugly for bulls just yet.  I think this market has a work
out left with a seductive little mistress known as seasonal strength before we
see any prolonged move to the downside.  My most optimistic near-term forecast
is for the Spoos to kiss 1220 and the Dow to have a one-night stand with 11,000
– just in time for the retail crowd to hop onto the bandwagon, an event which
will be met with a big thud of professional selling.  From a timeline
standpoint, I think we could see the bulls start to get seasonally tired after
the new year.  I think there will be a number of additional signs of weakness. 
One index to watch will be technology, and the index leading technology will be
the Sox.  When the semis start to negatively diverge from the market as a whole,
it will be time to start looking for the exit sign. 


Another sign I’ll watch for a top in this market
is Volatility.  You’ll recall that over the past two months we have been posting
the long term Vol chart below.  When Vol moves into our buy area at the bottom
of this chart.  When market fear is a buy, the stock market is a sell. 


Portfolio Strategy:  The trend is up and I intend to remain
positive.  A move and hold under 10600 would cause me to move to neutral,
however. 

Mark Melin