Stockmarkets - An Update - Are They Topping Out

Those who have been reading this newsletter over the previous months/years will know that we generally only trade the markets from a longer term prospective. So while the majority of the market, egged on by the media, try and generally base their investment decisions on what happened that day or week we prefer to sit back and watch what happens over several months.

One of our foundation beliefs is that long term trends are tenacious by their very nature and therefore this tenacity often means these powerful trends in force last for a lot longer than most people think.

So it is always an unlikely prospect that a stockmarket bull will end with a inverted V top, ie straight up and then straight down (unless of course the top is a parabolic blowoff, say adding 10-20% of value in a matter of months).

A long term trend that is going to reverse will often take many months and sometimes even up to a year to work off its bullish tag, and while this maybe what we're seeing right now it's still too early to tell.

Of course, within any longer trend there will always be retracements and the key to these is deciding when a retracement finally breaks the back of a trend or is indeed just that, a retracement which offers investors further buying opportunities.

Current Analysis Of The Stockmarket Is Simple

Back in the January 2006 newsletter we promoted the concept that analysis and research into where the Stockmarkets (mainly the US which will in turn decide the fate of London) were heading in 2006 was simple - all we had to do was look at the long term chart of the American Broker Dealer Index (XBD).

• The financial sector had been a leader if not the leader in the bull market which started around 2003
• The bull market has been built by the continuing loosening of credit by a reckless and short term thinking Federal Reserve - and as long as this policy continues the more money and profits the financial sector will likely continue to generate
• Once the party ends (or looks like its going to end) the chill will hit the financial sector hard and just as this sector led the overall market higher, it will lead the overall market lower
• Therefore to keep analysis very simple just use the XBD as your road map
• You can read the full article here in the January 2006 issue of this newsletter

Our Stockmarket Strategy For The Next Few Months

One of the advantages of not really being around the markets for 6 weeks is that it's given them time to manoeuvre and hopefully make the technical picture clearer. But we haven't changed what we said back at the beginning of June, ie the bulls should hold tight with the bears not getting too excited. But perhaps though it is now worth following the market and any individual stocks you hold just a little bit closer.

Chart 1 above is the XBD weekly chart from the end of May 2006 and Chart 2 is the updated chart till the 21st August 2006. Note that from a technical angle we now have a point of reference being the June lows of around 190 (189.89 to be precise).

If that level were to be broken with any sort of volume/acceleration/follow through then the long term bull market in our opinion would likely be over. However, it's actually slightly more complicated than that because as that level is so critical paying attention to what the XBD does if/when the market trades down there is all important. If for example the XBD trades lower, breaks 190 and doesn't follow through or continues to trade under 190 for a minimum of 2 weeks then it's very possible that the bears are being setup with a powerful rally not far away.

Will There Be Any Clues As To If/When The Market Will Breakdown

We admit, if we thought about the market or its future direction we would not be bullish. There are too many negative factors around which scream sell or go short. But thinking is often a bad and counterproductive mistake when analysing the markets whereas trading what you see often pays dividends and right now we still see a longer term bullish picture on the charts. Look at chart 2 yourself, does it look like a hyper bearish picture?

• Having said all of that the market is really under our microscope at present
• The move from 190 on the XBD should make it back to at least the 226.4 level (last weeks high was around 120)
• If it doesn't make it back to at least 226.4 then that would be a big black mark against the bull because it signals a lack of underlying power
• If the market were to then move down towards 190 all hell could break loose
• Still, it's too early to suggest anything apart from the bulls must see the XBD trade back to 226.4 in order for their long positions to remain justified

Summary

Another reason we're continuing to be bulls of the market is that it's the hard thing to do right now. Not many people are bullish, most of the articles and reports you read in the media are scare stories, an example being some major technical analysts on Wall Street who are predicting a 20% fall in stock prices by the year end.

Whatever the case the markets are heading into a real high powered Chess game for the rest of the year. At the moment the bulls still have the upper hand but the risk of the bears getting control has never been as high over the last 3 years than it is right now.

Stay tuned for next month's update. If you haven't already signed up you can do so here to receive a copy of this newsletter when it's published (your email address is 100% respected - we don't send any Spam!)

>> Next Page - Is The Long Term Trend Still Higher For Gold & Oil Stocks Are Cheap