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Markets have maintained their strength over the last week or so and it appears there is calm for the moment. This is a time when sellers and buyers will sit on their hands and contemplate what lies ahead.
Let’s go to the charts:
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An ABC pattern suggests range trading but this does not mean we won’t see sizable moves at times. But it does mean they will be both up and down and within a range, as opposed to a trend in either direction.
We can see in the Bollinger Bands that the market has reached the upper band:
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At these levels there are risks for buyers, which may be from existing stockholders topping up or new buyers joining in on the back of the recent enthusiasm. It is of course possible that the market could go higher from here and hit the upper band, even as the upper band heads higher itself. This happens in a trending market but I doubt very much that this is such a market.
We must always remind ourselves that a ‘market’ is comprised of sectors and that sectors are comprised of stocks. The market is a ‘mean’ or average and the components of that market may move either side of this mean. So we could see some stocks continue to move higher and some retreat.
I am looking for strong trends that will last for weeks with definable - and therefore manageable – risk that I know and understand.
Markets traditionally rise into the last few days of the calendar year. However, this is not a given and we should be wary of such adages.
I analyse each sector and look for stocks that have upside but I cannot currently see any sectors or even many stocks that would entice me to part with my money.
As you know, I make much of the Oscillator, which let me down last week. This can happen. The past is in the past. I will show you what I mean:
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The oscillator has recovered from being well below zero. That is now history and we should direct our attention to today and the ‘switch’ I have highlighted around zero. This does mean we have to look to the next move. We do not have to have a view about what might happen, rather just watch as it emerges.
If you are invested then you will have been happy with the last couple of weeks. Father Christmas came early!
When I am invested I use these so-called rallies to prune stocks I do not want to hold any longer. That is, I sell into the rally. You will need to be quick however, as these rallies generally happen between Christmas and New Year when most people are sleeping off their Christmas turkey. And volume is usually thin, unlike post-Christmas waistlines!
Enjoy the ride
Tom Scollon
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