| Gar's Market Blog
Outlook for week
ending Sept 17, 2010
What
Will September/October Bring?
Historically,
September is the worst month
for the stock market, and October
can be even worse. For instance,
two of the greatest one-day
market crashes have been in
October of 1929 and October
of 1987. And, of course, there
was the financial meltdown in
September-October of '09. Is
the same thing in store for
2010?
Perhaps
not. For one thing, people have
already anticipated this, and
as a result, the "weak
hands" have already sold
and are sitting on the sidelines.
From a contrarian point of view,
the market is not likely to
downslide if most people (who
want out) are out, because it
removes potential sellers from
the equation. Remember, tomorrow's
seller is today's holder. Less
holders = less sellers in the
near term.
Crystal
Balls
Some
say that no one can predict
market direction. Others say
you can (mostly chart technicians).
In a way, both camps are correct.
While you cannot predict market
direction over a long period
of time, you can often get a
pretty good gauge of where it
is going in a shorter period
of time, say, 10 to 30 days.
And the reason this is possible
is explained in the old trader
cliche, "The trend is your
friend."
For
the most part, a trend, by definition,
will continue. Hence, knowing
the current trend will predict
the most likely direction in
the near term. Note, however,
that the key words here are
most
likely.
Nothing is certain, which is
why the "no-one-can-predict-the-market"
crowd is at least partially
right.
The
Histogram Crystal Ball
One
of the best ways I have ever
observed to predict general
direction is to set up a MACD
histogram on a daily chart of
the S&P-500. The following
example shows SPY (S&P-500
ETF) and a MACD histogram:
Note
the nearly spooky accuracy of
the "red" and "green"
bars. When the histogram starts
showing green bars, the market
rallies, often for several days
or even weeks. When the bars
go read, the market falls. Who
said you can't predict direction?
Fine
Tuning
A
fine-tuning element might be
to observe the relative height
of the histogram bars. If you
look closely, you will notice
that when the bars are a "staircase"
pattern (getting progressively
larger), the market follows
suit and continues in the indicated
direction. When these bars decay
(get smaller and smaller), the
market trends to start reversing
its trend.
Play
with the numbers on the histogram.
It is a wonderful tool!
|
