NFTRH; Strategy: SPX & HUI (high priority)

As you know, your letter writer has been waffling a little over the last couple of weeks with respect to the favored plan, which to me made a lot of sense. Completely over bearish sentiment needed to be fixed with a market bounce, just as happened last winter.

But we have labeled it just that, a bounce, not a new bull leg. It was not easy being bullish even for a bounce during the immediate run up to the Christmas Eve stock market plunge. Yet a bounce was coming and we had it covered.

But what is happening now is the potential for something I have seen all too often in the history of my own market experience; that the bullish juices do not automatically stop flowing just because the process has come to a logical termination point that was plotted well in advance. This is why you’ve seen me doggedly balance my portfolios (weighted long, with precious metals positions) despite the favored downside target not yet reached on SPX.

We have sentiment back in order (from deeply over bearish), we reviewed a chart from Ned Davis Research showing the S&P 500’s valuation history to be eerily in line with our downside targets (2100 and the longer-term 1500, if a real bear market unfolds) and we have technical support (2100-2200) that looks like a no-brainer to hold for at least a strong rally.

But what if the memorable (by me anyway, as I was watching it and buying it) Christmas Eve massacre was the bottom, the max tension point on a slingshot? As noted at the time, sentiment surely was in line with that view and a subsequent breadth thrust out of those lows was as well.

This morning and typical of markets, the S&P 500 is pushing the absolute limit of the 2600-2650 upside target of the “bounce”. So our plan is intact. But hear me now, if the favored plan is wrong it is wrong. No ifs, ands or buts. No whining about the plunge protection team or other such rationalizations. If I am wrong, I am wrong and will admit so and adjust. Simple.

Beyond that (2600-2650), it could still be just a bounce to the now slightly down sloping SMA 200 (as has happened with my current short position in Biotech) that is in play. But per the weekly chart we have reviewed several times, the market is right now at the neckline to a pattern that must hold as resistance.

So if daily SPX (below) takes out the SMA 50 I will consider reducing or even eliminating short positions and see what develops. In late December it was hard to project a bounce to 2600 amid pervasively bearish sentiment. Today it is getting easier and easier for casino patrons to feel bullish.

If the SMA 50 is taken out the next upside target area would be around 2750 and the SMA 200. The market is entirely capable of failing at that level and rolling over under the weight of the now slightly down-sloping SMA 200. But I don’t think I’d want to carry shorts to that point.

Side note: I am aware that what you just read above is exactly how bear markets shake out shorts prior to a glorious plunge. Especially we chart dorks. So regardless of what goes on today I will try to have patience through the weekend. But there are limits to my patience.

On the other side of the equation is the gold sector, which we noted in an earlier update to be operating under a more positive sentiment backdrop. If I am proven wrong on the short-term bounce view of the market above, the support we noted at HUI’s SMA 50 (interesting and very logical how as the index above has risen to its SMA 50 the index below has dropped to test its SMA 50) would be likely to fail with Huey likely destined for the channel bottom.

From the update…

A daily chart of HUI shows a logical recovery point where the SMA 50 meets short-term lateral support. A failure at this area probably means a trip to the channel bottom, but the sentiment backdrop is supportive of a hold here.

As with the stock market scenario, where I will reduce shorts if additional short-term upside is indicated, I will reduce exposure here if a drop to the channel bottom is indicated by a loss of the SMA 50 and a stock market targeting higher short-term levels.

Bottom Line

Please respect the differences in implications between short-term and long-term strategies. The stock market may well have entered a bear market even if a short-term rise to the SMA 200 is in the cards. HUI may have begun a bull market even if a short-term drop to the channel bottom is in the cards. SPX has trended down since September and HUI has trended up since September.

Personally, while not being a day trader I do not like to go contrary to even short-term trends that go beyond my resistance/support limits. In this case, the stock market’s upside bounce and HUI’s pullback. So I am talking about making potential short-term adjustments, not abandoning larger plans. Even there, as of now nothing has changed. But I want to illustrate the parameters of what keeps us on plan or alters it in the short-term.