Thursday, February 21, 2008

Timely Technicals

At times of uncertainty it often helps to look at a picture to understand where we've been and where we are. Too often the use of technical trading tools is either over used or too quickly dismissed. I once had a client who would always call charts suspect because they were nothing more than self fulfilling voodoo. Self-fulfilling seems pretty good to me. To avoid the identifying trends and changes in money flows simply because it is a picture rather than a talking head on network televisionis simply silly. They are looking at charts too.

The S&P 500 chart below shows a broad market that has clearly entered a new trend, breaking the 200 day moving average decisively. The triangle pattern is tightening and indecisive. From a technicians perspective, a triangle is a known as a continuation pattern and generally will break out from the apex in the direction of the prevailing pattern. If it breaks downward on significant volume investors should take measured but defensive action.

The surrent oversold condition gives some hope that there could be a counter trend rally back to the trend line about 100 points or 7% higher than today's close, but the developing pattern does not bode particularly well for equity purchases.

Clients continue to be in relatively defensive positions for wealth preservation rather than capital growth. Against the backdrop of steadily deteriorating economic news and the technical bearishness, we will use counter trend rallies as sales points and resist the seduction of bargain hunting on drops. This is a trader's quick or dead market which is not our longer term strategy so until technical and fundamental indicators show a new upward trend, we remain diversified preservationists.

John F. Barnyak AIFA® 2/21/08
Stonehouse Asset Management