Investing for stable, steady growth PART 2

A few days ago, I wrote about some strategic principles for investing for stable, steady growth. I did not give any current examples though. I could give several. I will give the example now featuring the US stock market index called the Dow Jones Industrial Average, which is an index composed of 30 very large US companies.

I focused on trendlines a few days ago. Here was a clear multi-day trendline shown at 10:15 EST this morning:

set-up for trade2

Here is a similar trendchannel in the US NASDAQ stock index. Notice that there was a “trendchannel” going back several days and that last Wednesday, US stock prices briefly exceeded the upper limit of the trend channel. Notice how the pink line could be extended further back to the left but in the middle of the 10-day chart (on last Wednesday), prices were just barely outside of that trendchannel:

set-up for trade3

So, there has been a clear multi-day uptrend. In fact, there has been a multi–month uptrend in US stocks. (Shown below)

Now, as stocks approach the lower trendline in blue above, what other data could give us some bias as to how this trend will resolve (end)? Will the trendchannel “break” to the upside (accelerating the steady uptrend) or to the downside?

My bias is down. The data below shows why: 97% of surveyed investors are ALREADY bullish (optimistic) about the US DJIA index. That only leaves 3%. Earlier in the rally, the percentage of bullish investors rose from 60 to 70 to 80%. That is how the rally happened” people who were not optimistic eventually became optimistic and started buying in to the rally.

set-up for trade4

Here is the multi-month trendline (an entire year is shown). The low in the middle of the chart is November 2012:

set-up for trade6

I presume that the trendchannel on the right is obvious. Still I will add a few lines to show two distinct trendchannels, plus a pink line of the recent multi-day trendchannel:

set-up for trade5

So, we have prices approaching the TOP of the brown trendchannel. When prices approach the top of a channel, what do we expect? OFTEN, prices will fall from the top of a trendchannel. Further, we have the overwhelming evidence of a nearly-exhausted rally with the 97% bullish sentiment indicator.

(Note that I already entered positions because prices broke the pink trendline between 10:15 AM EST today and right now. Of course, I entered positions that benefit from a DECLINE in stock prices. I am also “long” on silver and gold for similar reasons – trendchannel resistance, sentiment extreme, etc….)

So now let’s look closer at the “converging triangle” of the last few months of prices:

set-up for trade7

Prices since 10:15 EST have fallen far enough that I entered positions.  They could rise for another day or two, but one of the two above lines will be violated. Either prices will fall below the pink line or rise above the brown one. If prices rise past the brown line, I can exit for a small loss. If they plunge below the pink line, my gains will be enormous.

One of the above trendlines will break this week. As famous Texas billionaire Ross Perot would say: “look, this is not rocket surgery, people!”



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