One View of Market's Future

I first started writing about the critical area between 1150-1200 on August 7 (wow, doesn't seem like 3 months ago), the day the Index broke through 1000 for the first time since the March 9 bottom and closed at 1010.48, or 7.6% below today's close. In "Difference Between Correction/Consolidation and Reversal" I wrote,

"The recovery from the Tech Bubble Crash saw a major correction that lasted most of 2004 between 1050-1150; my interim target for the first one ...... is the 1150-1200 area. What will this correction look like? It could be a wedge, a pennant, a channel or merely a return to a trendline or moving average ... but it won't be a head-and-shoulders."

Many readers then were skeptical and wondered whether the market would be able to cross above the 300-DMA or to stay above 1000. But the market labored ahead and three successive surges (the current surge since November 1 will the fourth) each ended at successive new highs.

A couple of days ago, I outlined a "game plan" which appears so far to be working and close to hitting the goal of 1125 (I beg some lea way to extend the target range to 1150). As the market approaches the target, it's time to start speculating about what might come after. To repeat, this is mere speculation and guesswork as no one can predict the future but we have to some view so as to develop an action plan. If the view turns out to be wrong (and we'll know when that is), we modify the action plan:

• The market begins to stall out in December as:
• the door for the sidelines-money slams shut for the year
• tax selling begins to capture losses and record gains in anticipation of possible higher 2010 tax income rates
• The 1150-1200 is a critical area for past pivot points where the market turned in 1998, 2001, 2002, 2004, 2005, 2006 and 2008. These pivots occurred both when the market was trending up and down.
• The turn is usually caused by an economic catalyst and one that could fit the bill perfectly would be:
• The $US Dollar firming and possibly reversing its descent.
• The "Soft Dollar Trade" (buying foreign currencies, gold and commodities), considered by many as "over-crowded", begins to unwind and the market begins to decline.
• A logical target for the bottom of this correction is the neckline of the market's inverted head-and-shoulders bottom, or approximately 950 in the S&P 500, a 17% decline from the high.
• The decline fall within the definition of a correction falling short of the 20% required to considered a "Bear Market".
• The Index will find support on the 200-DMA, the crossing of which is a key indicator identifying Bull and Bear Markets
• The 200-DMA will have crossed the 300-DMA by then
• The 300-DMA will have turned up, the final hurdle before the book on the Crash can be finally closed.

For those who are habitual chartists and think in terms of graphs rather than words, here's a depiction of what the above scenario might ultimately look like (click on image to enlarge):Many out there will scoff and say this is pure fiction, nothing more than reading a Ouija board. But is it any more fictional than some of the stories that are spun by the "talking heads". They represent prestigious firms with large research departments but I write this blog. We'll follow the future unfolding and learn who's projection, given when, winds up being closer in the end.

The corrrection or consolidation could be short lived as the true top of this bull market could be nearer 1350 with the neckline at 950 being half-way between the bottom at 660 and the top on a percentage basis but a potential 17% correction demands an action plan. Help us all out. What will the market correction look like and what actions will you be taking when the arrives?

Note: I refer the scoffers out there who brush off this exercise you to "Fairy Tale with a Happy Ending", something I wrote on November 6, 2008. I inserted a chart in that article similar to the one above. That chart turned out to be uncannily similar to the market's actual ultimate course with the major difference being that it took longer to get here than I had projected. So be careful in rejecting this exercise too quickly.

More Stocks on the Move

I did a little market researching this weekend and visited two, outstanding but dramatically different retailers: Whole Foods and Ikea. And even though they cater to two different clientele, I found one thing they had in common: both were filled with shopping families lugging their kids and totting bags full of stuff. It sure didn't look like these stores were suffering much from the 10.2% (or close to 17% as some say when you add in those who stopped looking) unemployment.

At the end of October, I inserted some chart projections and outlined the following game plan:

"If the market successfully bounces around 1018, there's a possibility it could then lunge ahead .... for a final gasping 10.5% gain to 1125..... The 1125-1150 range of significant for several reasons: 1) it's been mentioned by many analysts as the high for the year and 2) it's on the extension of top boundary of that channel....Violating the 50- (and 200-) day moving average wasn't calamitous in July (the market then proceeded to surge ahead by over 25%). Another big, though not as extreme, move may follow this violation. Simultaneously, the 200- may cross the 300-dma and the 300-could turn up paving the way more gains later."

The market did touch an intra-day low of 1029.38 (pretty close to 1018, wouldn't you say) a couple of days later and has since jumped to 1069.30. Even with a consolidation or correction anticipated just over the horizon (I can't tell just yet how severe or deep it will be), it's might also be prudent to replace some of the stocks that you're pruning some of the losers out of your portfolio with better performers just in case the bull market surprises us all and continues moving higher and longer than expected. If there's another 6-7% left before a correction begins (or, if I'm wrong and the market continues heading even higher) then what sorts of stocks might lead in addition to the precious metals, energy and other groups or stocks mentioned here previously.

Last July, I outlined a screen called "Stocks on the Move" and presented a spreadsheet of 135 stocks meeting the following criteria:

• Price per share > $15
• Price percentage change today > 0.5%
• Relative Strength Indicator today > top 50%
• MoneyStream Surge for past week > top 50% (proprietary to Telechart grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator. The result is an indicator with much the same objectives as OBV and is interpreted in the same way you would interpret OBV. Generally, you look for divergences.)
• EPS percentage change from 4 qtrs back > top 50%
• Volume surge over past 5 days > top 50%

Since then, those stocks have appreciated, on average, the marginally more than the S&P 500 Index (12.9 vs. 12.0%). However, relative to the high price during the period (July 22-Nov 6) the group's performance, on average, more than doubled that of the Index (25.0%). If STEC, DRIV and ICON had been excluded from the original group, the groups average performance had been appreciably better than the index (for an updated spreadsheet of these 135 stocks, click here).

A new "Stocks on the Move" screen now produces a list of 107 stocks, of which only 7 stocks were on the previous list (the list is on the second tab of the spreadsheet). Of the total, only 39 stocks are trending such that the moving averages are aligned in a Bull Cross (P>50DMA>100DMA>200DMA>300DMA) and the 300DMA has turned and is now rising. Based on these technical indicators, these 39 might have the best chance of smallest impact of any market correction. A short list of these stocks might include:

• AMZN
• ATHN
• BIDU
• DGIT
• GG
• IAG
• LL
• MELI
• SYKE
• TEVA

Another Basket of Speculative Low-Priced Stocks

I don't know how many of you were readers back in the depths of November 2008 and February 2009 but I floated the idea of assembling a basket of low-priced stocks, something I called "Perpetual Call Options". Well, it seems that there's a lot of truth in the saying "timing is everything" (or "don't fight the tape" or any others of the many sayings around Wall Street).

Back then my thought was that there were just too many stocks that had been beaten down by the extreme general pessimism everywhere in the air and that while one or two of those companies might fail (ala Lehman, GM or CIT), they wouldn't all disapper; some would eventual recovery and their prices would rise sufficiently to offset the ones with losses. Here is a recap of the results of both lists (click on image to enlarge):

The market is up 19.8% since February 9, the day I wrote about both the second (coincidentally, the market was at approximately the same on both dates). Over the same period, both of the lists have appreciated over 60%. As expected, three of the stocks in the November lists declined since November but the gains on the others more than offset those losses. Likewise, three of the stocks in the February list underperformed the market but, here too, several others did significantly better that the market.

Others gave a pejorative label to the strategy, they dubbed it the "dash for trash" - the strategy of buying low priced, high volatility stocks, with barely any regard for the fundamentals in the hope that market momentum will cause them to appreciate. Well, guess what, if my sample of two is any example, it worked.

But I'm not like another blogger elsewhere who continually writes "I bought them (yesterday, last week, or whatever) and just sold 'em (yesterday before the close) and pocketed a huge profit" (sound familiar TK?). Unfortunately, I was too conservative myself and only bought and still have a couple of them. I wish I could say my picks were based on skill but it really wasn't. The selection was made when the market was a very depressed and-remember-stock selection was like shooting fish in a barrel.

As the market moves into a new phase, will the "perpetual call" or "dash for trash" strategy still pay off? Are there any stocks left that are suitable for another highly speculative basket? Interestingly, there are still over 1400 stocks (about 30% of the total) under $5 and around 2400 (almost 50%) under $10. So why do we always chase after the likes of JPM, PG, AMGN, AAPL or AMZN.

With the economic productivity numbers coming in today better than anyone expected, some are now talking about a real burst in profits as volume begins to build faster than people costs across the economy. It's the sort of environment where the stocks of survivor companies, those have been left behind for dead, can start shining again because they're starting from a low profit base, low valuation and low stock price. The upside potential is great and the downside ... well, they're not far from zero now.

If you put an equal small dollar amount ($1000 for 625 shares of stock selling at 1.60, for example) in each of about 10 highly speculative stocks together a small basket you might wind up in 6-9 months with the basket having grown in size, much more than had you put that same money into SPY. You probably will get some duds or failures but you'll also have one or two stars.

I trolled the charts of stocks under $2, stocks that look they're making an effort to start heading up. I came up with a typical list of random stocks:

Stop! Before you go out and buy these stocks, memorize these caveats:

• The stocks were selected randomly and not based on any fundamental analysis (or rigorous technical analysis either).
• Success on the prior lists above are no guarantee that any other list of "perpetual call options" or "dash for trash" will produce equal results or positive results at all.
• This discussion is more about a tactic rather than about specific stocks. There is a large universe of stocks to pick from and you should make your own selection.
• You know your own tolerance for risk so, if you do something like this, you have to decide on how large the basket could be and how many stocks in that basket to spread the risk.
• Many low-priced stocks are thinly traded so you should set the price you're willing to pay and use limit orders.

Most importantly, the two "baskets" I described above were started at the beginning of one of the best bull market recoveries in stock market history (over 60% in 7 months). Basket 1 above actually took a large loss between November to February and only started appreciating as the market recovered. There's no need to hurry and put something into place because the best time to launch a strategy like this is at the beginning of a bull market trend. It's perhaps best to stick this in the back of your mind and pull it out after the consolidation.

US Dollar Index (DXY), Gold (GLD) and the S&P 500 (SPX)

Several days ago, in "Managing Portfolios Today With Three Indicators", the first indicator in the list of three indicators impacting today's market listed was $US. You've heard the talking heads say this and you read other blogsters write about this but have you seen the relationship presented graphically. I haven't so I thought I'd research it and bring the results to you.

The charts below are the value of the S&P 500 Index (.SPX) and the price of the gold etf (GLD) in both cases compared against the US Dollar Index (.DCX) which measures the performance of the Dollar against a basket of currencies: EUR (Euro), JPY (Yen), GBP (Pound), CAD (Canadian), CHF (Swiss)and SEK (Swedish).

Each panel contains trading over the past three trading sessions for the S&P; you should note that currencies trade 24-hours/day so you'll see gaps between the Dollar Index on one day and it's value at the opening of the US market's the next day. The Dollar Index is the blue line; the S&P Index and GLD are the multi-collar (or tan) lines.

• S&P Index vs. US Dollar (click on chart to enlarge): Sure enough, there is a pretty distinct inverse correlation these between the value of the dollar and the US market (most clearly seen in last Thursday trading). Today, the market had a terrific first hour and a half of trading as the Dollar Index was declining. But at around noon, the Dollar Index starting rising and the market starting falling. It continued until 2:10 when both reversed direction. Is the tail (dollar) wagging the dog (market) or the other way around?

  I'm sure the reasons are complex and convoluted but there's no mistaking the fact that as the dollar's value drops, US stocks become more valuable because of the large percentage of profits made overseas, because its less expensive for foreigners to buy stock in US companies .... all the above reasons and more.

  
• Gold vs. US Dollar Index (click on chart to enlarge): Underlying worldwide supply/demand factors (industry and jewelry usage, sovereign demand) impact the price of gold and gold is also traded around the clock so the relationship between Gold and the US Dollar Index, although inversely correlated, is less direct.

  Each time the US Dollar index increased, the price of GLD (in $US) went down and vice versa.

Granted, three days offer only a peak and more data over longer periods are needed for sound economic or academic conclusions. But when I looked at the same data others have been looking at, I clearly see the relationships.

Editorial Comment: I feel somewhat unpatriotic but, for the sake of exports, our stock market seeing higher earnings, improved ability to pay our debts to foreign holders (in cheaper dollars), and improved export opportunities I'm rooting for a weaker $US.

The biggest risk will be in the importation of inflation through higher worldwide commodity prices (expressed in the lower valued $US Dollars) and higher cost of all the cheap goods we've come to expect flooding our retail stores. It may be a simplistic, short-term perspective but a weaker Dollar may actually help rejuvenate our industrial sector by reducing our reliance on imports.

What do you think?

Stock Market Road Map

Has a consolidation correction actually already begun and we just don't realize it?

We've been in an uptrend frame-of-mind for so long, that it's sometimes difficult to fathom that something might have changed or that the current market just isn't what we've grown pleasantly accustomed to over the past seven months. But my sense over the past several weeks is that something has changed. Besides the nearly 3% drubbing the market took on Friday and the whipsawing swings of sentiment on Wednesday and Thursday, are being broken and there's increased risk of moving averages being crossed.

So let's zero in more closely than usual, step by step, on the market's recent action to see if we can distill out clues to whether the market is possibly in the early phases of an emerging chart pattern or whether the uptrend is still intact so we don't feel like we're wondering aimlessly:

• End of Month Patterns: This is probably the first time you will have heard this but the Sept-Oct had a distinctive bend to them this year. Instead of following historical precedent as the "worst months of the year", September and October (and to a lesser degree August) had awful end-of-month cycles. The last 7 trading days of September plus October 1 and the last 9 trading days of October turned in 3.9% and 5.62% declines; the final 3 days of August plus September 1 likewise saw a 3.2% decline. The first portion of both months showed respectable gains. If November follows suit, Monday won't be good but the remainder of the month to around Thanksgiving could deliver a sizable gain.
• Trendlines: I've inserted an upward sloping channel by connecting the pivot points (points where balance of power flipped between buyers and sellers) at the beginnings and ends of those end-of-month declines discussed above. Since Friday's close violated the bottom support trendline, the obvious question is where will be the next low. My guess is that Monday, November 2, could see an intraday low at a key level, 1018, another 1.7% decline, since that was the intraday low on October 1 and a level the market gaped through in August. It seems to be an important play area for the market. [Coincidentally, my Elliottician friends are quick to point out, 1014.8 is a 38.2% Fibinacci retracement level between the 1098.74 close and the 879.13. A bounce at this level with conviction will support a continuation of the trend.]

  If the market successfully bounces around 1018, there's a possibility it could then lunge ahead following the September-October routine for a final gasping 10.5% gain to 1125, with the sidelined cash finally being put to work before year-end. The 1125-1150 range of significant for several reasons: 1) it's been mentioned by many analysts as the high for the year and 2) it's on the extension of top boundary of that channel.

• Moving Averages: Although the 50-DMA was violated last week, the 100-DMA is still intact and will probably remain so in the near term.

  Violating the 50- (and 200-) day moving average wasn't calamitous in July (the market then proceeded to surge ahead by over 25%). Another big, though not as extreme, move may follow this violation. Simultaneously, the 200- may cross the 300-dma and the 300-could turn up (as described in "Mark These Dates .....") paving the way more gains later.

• A Reversal Formation: If the market does bounce around 1018 either Monday or Tuesday, then the level becomes an important element, along with the October and November peaks in defining a pattern that could dictate the course of the market during the first half of 2010. Will these precursors become the early phase of a reversal or merely the beginning of a consolidation pattern. We'll leave predictions like that for economists (and stock analysts focusing on fundamentals); for chartists, all we can do is anticipate and be prepared to react when it happens.

Some inquisitive readers may question "What happens if you're wrong? How will you know if you're wrong?" Agreed, this is pure speculation but it's a plan, a map, and we use maps to help us know where we are and find our way to where we want to go. If the map indicates a turn but the road goes straight or if it indicates straight but the road has a bend then .... we know we're in the wrong place and we have to change our course.

That's the same with this fictional market road map for the next couple of months. Rather than a prediction, it's a plan of action for managing risk and measuring expectations. As of Wednesday next week, we'll know whether the risks are higher and plans and actions have to change or, if we're lucky, we'll see higher prices by Thanksgiving.

Managing Portfolios Today With Three Indicators

I don't know how many of you are full-time traders, how many self-manage your portfolios on a part-time basis or how many visit here only periodically to get a different take on the market, something that you can take back to your financial advisers just to let them know you're looking over their shoulder.

But I spend most of my day with my Fidelity trading platform (Active Trader) running on one screen and my charts or whatever else I might be working on, reading or playing (I'm a mediocre chess player) on another screen. Furthermore, as the day progresses, I have either Bloomberg or CNBC running muted over my desk so I can see how the market is doing and watch for any major news headlines. Periodically during the day, I calculate how closely my portfolio tracks, percentage wise, the S&P in the hope that it does better than the benchmark index (either gaining a greater percentage or losing less of a percentage).

The reason I tell you this is that I find that my portfolio rarely ever moving opposite the benchmark. They usually move in tandem, it's only a matter of degree. So managing my portfolio is rather simple. It's essentially a cash, or risk, management decision: how much do I want to have at risk given what I see happening in the market and only secondly in what types of assets it should be invested. In short, the portfolio management decision is essentially a market timing decision. I spend most of the time trying to figure out whether the direction of the market's trend has changed (the answer I share with you).

As an aside, I went to an MTA (Market Technicians Assoc.) meeting last night and heard an excellent presentation by Frank Teixeira, of Wellington Funds and the manager of John Hancock's new Technical Opportunities Fund that I'd like to share with you. One of his points that obviously resonated with me, is that more and more institutional investors are disappointed with Index funds or the notion that "there's always a bull market somewhere" and it's only a matter of finding it. They're disappointed in "buy-and-hold" since the strategy since 1999, a long ten years, has led to returns only marginally above break even. Given the two market crashes since 2000, the objective now is managing risk and the tactic is to consider cash a safe default investment.

He also said that the world of investment alternatives has greatly expanded with the introduction of all sorts of etf's and adr's. There's no way one person can become familiar with all industries, all commodities, all interest rate trends, all currencies around the world. But the worldwide search for investments can be narrowed by using technical analysis (studying trends) and looking at charts. Human behavior, as represented in price trends (charts), is the same around the world for all assets.

Having said that, the key to where the market will be next March can be found, I believe, in essentially three areas: 1) the foreign exchange value of the $US, 2) monetary policy as reflected in interest rates and 3) the US economy as reflected in the S&P 500 index. [The only thing that has a significant impact on our portfolios but we have no way of predicting or monitoring is what Congress does with income taxes.] Here are the relevant charts:

• $US: If this were a stock chart you wouldn't consider anything in the price action to indicate that a bottom has been reached and that a reversal pattern is being formed. If this were a stock, the only safe assumption would be that, at best, the downward trend remains in tact and, at worst, it will remain at current levels for a while (a couple of months) before turning back above 78.
• 20+ Year Long-term Treasury Rates: When interest rates increase, bond prices fall and vice versa. If this were the a stock's chart, I would sell or short it. Moving averages indicate that longer-term trends have turned down (how could they not have from the historically low current rates) and there's higher interest rate (lower bond prices) since the chart depicts a possible head and shoulder pattern. [A caveat is warranted here. Treasury Bond ETFs are relatively new so there's no history of how the ETF will perform over a wider range of interest rates.]
• S&P 500: This is what we're all interested in. If the neckline of the inverted head-and-shoulder that everyone now believes was the bottom is the mid-point of the move from bottom to top (a standard technical charting conventional rule), then the full extent of the bull market run could be to 1328. But the full move can be divided into two, separated by a period of consolidation. We could no be seeing the beginnings of that consolidation (given that volume supporting further upside is waning as indicated by OBV diverging from price).

Bottom line? We are in or very near a consolidation. It's best to reduce exposure to risk by increasing cash relative to investments (I'm currently at 10% and plan to increase to 25% at the next opportunity). Looking at the above exchange and interest rate trends, I will look for investments that take advantage of those trends. But until the market indicates otherwise, the correction should be short with another leg up possible sometime in 2010. As Teixeira said, this first phase of the recovery has seen "a rising tide lifting all boats"; the next phase will see much more divergence among stocks, between the leaders, the average and the laggards.

Each Zig or Zag Is Not A Direction Change

If you listen to the "talking heads", everything sounds like a turning point, a change of direction, a crises, a screaming news story "Extra". But every zig or zag does not make for a change of direction in the market's momentum.

Remember how you got swept away like many of the rest of us with euphoria last Monday, October 19, as the market crossed the same level going up as it did a year ago when it cratered along with Lehman, it actually nudged across 1100 intra-day but closed at 1086.48. And now, 5 days later, CNBC stirs the pot by bringing out Doug Cass to announce, again, that he's shorting. [Interesting, though, Cass has been shorting since August as this SeekingAlpha article of August 30, some 7.5% lower than last Monday's high, entitled "Doug Kass Goes All In Short".] A zig last week and a zag today. Even though I've been saying the market's close to a top and today wasn't pretty if you're in the market like I am, I don't believe the momentum trend has yet changed and I don't believe last Monday will be the high-level market for this rally.

On the Friday before that high, October 17, I wrote "Begin Pruning, Trimming and Weeding Your Portfolio". I followed that up with two more articles last week about the market sending signals that it's tired and wants to take a rest. I listen to the market but I don't believe it says that you have to dump everything overboard just yet.

I'm still hoping the market will shrug off the psychological barrier represented by round numbers like Dow 10000 or S&P 1100 (the Lehman level a year ago) and make a final push through November to the mid- to upper-1100's. As I've described before (see "Ascending Everest: the Mid-Station Rest Camp", that's were the real resistance is. In the same way that we didn't jump all in until the market hurdled some key benchmarks on its way up, there are a number of hurdles that it has to trip over on its way down before we call it quits. On the other hand, we were going to buy after a correction that never came last summer, so we must also be on guard against waiting for a blow-off top that may never come to sell into.

Last week in "More Evidence We're Approaching a Top", I pointed to the rolling 12-month returns as an obstacle to moving much higher. Here's some more evidence that upward momentum is beginning to wane.

If you think back to April and May, we were looking to volume in the form of OBV (On-Balance Volume) as evidence that the bottom had been reached. That indicator is now pointing to a divergence. For the first time since the rally began in March, OBV failed to make a new high as the index inself was making a new high (click on image to enlarge):

It's not time to jump yet but it is another signal that momentum might be changing direction and that a correction might be coming soon.

More Evidence We're Approaching a Top

I bet you think the above graph is my EKG as I look at the market's gyrations. It's actually an oscillator, a momentum indicator that measures the market's gyrations, on a rolling basis, in terms of each month's prior twelve-month return. The chart above covers the past 81 years from January, 1929 to January, 2010 (click on image for larger and sharper view). Prior to 1939, the data is the DJ-30; data after September, 2009 are based on my assumptions (to see the spreadsheet with data, click here).

You often hear or read about Fibonacci lines, arcs or fans that many say tell you that a move in the market or stock is over-extended because it has reached a critical benchmark like a 50% retracement. But there are few measurements that are linked to a time dimension, like 12-month returns; the above chart does.

I think it's an amazing picture. What I find most amazing is its regularity. Usually, after the market has several back-to-back exceptional 12-month runs (where returns over the previous 12-month exceed 25%) it is followed by several back-to-back months of negative 20% return.

Conversely, when the market has a sharp sell-off, or negative back-to-back 12-month returns of over 30% (see 1932, 1937, 1974, 2002, 2008), there follows a bounce back of 25-30% returns. It's fairly regular and predictable.

What does this mean for us today? I appended a couple of hypothetical scenaria through June, 2010 to see what the graph would look like (the red lines at the right). Case 1 assumes the Index will remain flat (in practice fluctuate in a narrow range around...) yesterday's close of 1057; Case 2 assumes the Index will continue to move ahead and peak at 1125 in February and retreat moderately back to 1075 by June, 2010. The result is a spike equaling 1983's spike out of that recession and the 1997 bounce.

In any event, nothing continues growing forever. Moves much beyond the extent of repair that's already been achieved is inconsistent with market history going back to the Depression. That's not to say there will be a significant decline sometime in the near future. The other possibility is that the annual changes moving forward will decline to the point that somewhere in 2010, the market will be no higher and, yes, possibly lower than 1080 (I spelled out two possible forms the correction might take in "Two Market Consolidation Models: 2004 and 1933-35"). But I feel technical evidence is showing that we're quickly approaching the top of these climb.

Fuel for the Cold Winter Months

I've written here recently about the oil & gas complex as possibly the last group to breakout of long-term reversal patterns (see "Mysterious Happenings in the Oil Patch"). Cousins of the group that might be particularly interesting since we're approaching the winter heating months are the fuels used to heat our homes and workplaces: UNG (Natural Gas ETF) and UHN (Heating Oil ETF). What do these charts look like; I'm including OIL (Oil ETF) for comparison purposes (click on charts to enlarge):

• UNG: Due to what many say is over-production and the unavailability of storage capacity for the excess, natural gas prices have tumbled. But the price of UNG has fallen even more than the underlying commodity due to short sellers. Prices have begun to firm (note the small cup-and-handle formation that began in August) and there's a possibility of a short squeeze as sellers start to cover which could drive the price back up to the first resistance trendline at 18.
  
• UHN: If you live anywhere other than the sunbelt and use heating oil and haven't locked in your rate for the winter, then you might want to consider buying a winter's worth of this ligthly traded ETF (so if you do trade it, use only limit orders). It's hard finding a more perfectly formed ascending triangle reversal pattern. The characteristic of this pattern is that it very clearly depicts how buyers come in to the stock and overwhelm the sellers at higher and higher levels. They run out of steam at the resistance level but, the theory is, at some point in the near future as the bottom trend line continues to approach that resistance, a breakthrough will occur.
  
• OIL: Not surprisingly, OIL has a pattern similar to UHN. If one breaks out, the likelihood is that the other will too. The interesting thing about OIL is that many drillers, service, refiners and marketing firms have clearly formed reversal head-and-shoulders, double-bottom and, yes, ascending triangle, patterns and are ready to breakout when the big money is ready to come in from the sidelines.
  

So whichever of the Oil & Gas participants interests you the most (yes, don't forget the large integrated international firms like COP, XOM and CVX) putting some money to work in this sector is prudent.

Mark These Dates .....

Mark these dates on your calendar: November 17 and December 3. What's happening? These dates could mark when the market clearly steps out of a "bottom recovery" and, after what I hope will be only a brief consolidation, into unqualified bull mode.

On what do I base this? On the fact that the last of the slower moving averages, the 200-day MA, will cross above the slowest moving average, the 300-day MA on November 17. At that moment, each of four moving averages will be perfectly aligned from slowest (at the bottom) to the fastest (at the top) with the Index above them all - a perfect bullish alignment.

And what happens on December 3? That's when the 300-day MA could begin trending up for the first time since January 3, 2008, nearly two years ago. If it does, the last obstacle to declaring the recovery's end will have been cleared.

The above assumes that the market continues growing at about the same rate as it has since Labor Day, or approximately 6% per month, or 0.3% per day. If that happens, the S&P 500 will hit 1198 the Monday after Thanksgiving and the 300-day moving average will hit a low point a few days later, turning up from that point forward.

Why is the 300-day moving average's turning up so important? Moving averages are momentum indicators and incorporate the market's action over the preceding 300 days. It takes a lot of effort to overcome the impact of over a year's worth of lower closes and, once having achieved it, significant effort (a huge move down) would be required to reverse the momentum's direction. As a matter of fact, since 1963 (the extent of my database), a turn in the 300-day moving average has usually been followed by an extended move (either in time, percentage or both) in the direction of the turn.

I consider the direction of the 300-day moving average to be a confirmation of another momentum indicator we heard much about this past June and July: the Index crossing above of its 200-day moving average. Granted, the Index has risen sharply since then (about 27%) but the move has consistently been susceptible to being called a Bear Trap rally. Once the moving averages are aligned and all have turned up, there can be little question that a Bull Market is in progress.

Some will claim that I flip-flop and inconsistent. How can I one week say that I'm pruning, trimming and expecting a correction within days and weeks of say that the market is likely growing into a bull market. I don't feel being inconsistent at all. Consolidations happen all the time in bull markets and there's no better place to have one than the market transitions from one stage to another.

As a confirmation of the market's continued internal strength, here's an update of the indicators you've seen here before (click on table to enlarge):

The number of new highs continues to increase (1-year highs now at 510, or 10% of all stocks) and the number of stocks with Bull Crosses (the alignment described above that the Index could achieve on November 17) has grown to 1002 or nearly 20%. Meanwhile, the number of rollovers (that's stocks making new lows) is still less than 20 and stocks with Bear Crosses (the inverse of Bull Crosses) is 199, a mere 3.9%, and many are local and small regional banks.

The alignment of moving averages evidences that the correction could come soon (December to early 2010) and when a correction does arrive it might not be long nor deep. Again, no one can predict the future but, at least, that's what our operating assumption will be until the market tells us otherwise. "Sell in May and go away" and the "September-October worst month" scares were hollow. Hopefully this perverse market doesn't surprise us again by turning traditionally strong months into weak ones. We'll just have to stay alert and nimble, reacting quickly to any surprises it may throw our way.