Stocks Will Rally to a Major Top

By: Robert McHugh | Sun, Dec 2, 2012
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We believe stocks are making a final rally to a major top, a top for the centuries, and a Grand Supercycle degree Bear Market will start upon this rally's completion. There is a Jaws of Death pattern in stocks that has been forming for two decades. It is very close to completion, needing one more rally, a strong rally, that takes prices to the top of the pattern's upper boundary. Then, after reaching that height, a Bear Market for the ages will begin, something that will be greater than the Bear Market of 2007 to 2009, and greater than the Great Depression of the 1930's. Below we show this Jaws of Death stock market pattern.

Dow Jones Megaphone Pattern

Next we want to show you our Primary Trend Indicator as of November 30th. This Indicator is a long-term buy/sell indicator. It is telling us that stocks can rally further from here, but that a top could be coming in 2013.

Dow Primary Trend Indicator

The above chart updates our Primary Trend Indicator for the month of November, 2012, the long-term view, which the short-term trends operate within. We cover the short-term trends in our daily market reports at www.technicalindicatorindex.com. The Primary Trend Indicator generated a new long-term trend "sell" signal four years ago, on September 30th, 2008, just as the autumn stock market crash started, when the DJIA closed at 10,850.66, the first change from the buy signal October 31st, 2003, five years earlier, and the first sell signal since 2000. We saw a 4,400 point drop after this sell signal was triggered. On May 31st, 2010 the PTI generated a new buy signal, and it remains on a buy signal as of October 31st, 2012. Since that buy signal, the Industrials have risen 3,117 points (30.7 %). This indicator was weakening for months, but is now strengthening. However, it must be noted that this indicator does not change until several months after a new primary trend turn has started. The next Sell signal should identify when stocks have completed a Jaws of Death Grand Supercycle degree wave {III} top and {IV} down is starting.

Here is how the Primary Trend Indicator works: One of the tools we have in our arsenal to identify the status of a Primary Degree trend is a simple analysis of the 14 month moving average versus a Slower moving average calculation, the 5 month MA of the 14 month. It has been terrific at identifying multi-year trends, both up and down. It triggered a "sell" near the start of Primary degree wave (4) down, in mid 2000. What followed was a two and a half year, 39 percent drop into the wave (4) bottom on October 10th, 2002. It took a while for this indicator to confirm that the rally that started on October 11th, 2002 would in fact be a multi-year primary degree wave up, wave (5) up. But in October 2003, this analytical tool did in fact trigger a Primary Degree "buy" signal, which led to a four year further rally to new all-time nominal highs on October 11th, 2007 at 14,198.10. We got a near "sell" signal in mid-2005, but the rally rejuvenated itself, continuing on its "buy."

As of November 30th, 2012, our PTI remains on a "buy." The spread between the Fast and the Slow went positive in January 2010 for the first time in 20 months. It improved to positive + 417 in May, 2010, has fallen to + 228 as of November 30th, 2012, but has risen each month since July 2012's + 44 reading, so the trend is up over the past several months. Still, November's reading of 228 is far short of the 1,744 positive spread in December 2003, so a reversal could come fast. We require a 5 month moving average of the Spread between the Fast and Slow to reverse in a new direction for 3 consecutive months in order to declare that a new primary trend, a new multi-year trend, is underway. March 2010 generated the first of the three required consecutive positive readings in the 5 month moving average for a buy, April 2010 generated the second, and May 2010 generated the third, triggering the current signal, a buy signal. When Convergence occurs, it is an early warning that a new signal is coming.

There had only been three signals since 1997 before the current buy signal in May 2010, so this tool is useful for long-term investors, as it filters out the noise of up and down short term trends, keeping us focused on the significance of the primary trend. September 2008 was the third signal (a sell), and May 2010's was the fourth (a buy).

While I am not giving out trading advice, here is an idea to make money from an educational perspective using the Primary Trend Indicator: Investors or Traders can consider adjusting stock portfolios to add more cash (sell stocks) or play long term shorting instruments (such as DXD or SDOW or some other ETF that increases in value if the market is expected to decline after a new Sell signal occurs). Or, Investors and Traders could move back into stocks when a new Buy signal occurs, or if aggressive, could purchase leveraged ETFs that rise in value when the stock market rises, such as UDOW. We do these kinds of trades in our Platinum Trading program at www.technicalindicatorindex.com.

This Primary Trend Indicator is also useful for our Conservative Balanced Investment Portfolio we present to Standard subscribers at www.technicalindicatorindex.com since once we get a new signal, in the past we have been able to rely upon that signal for years. Further, it tells us which direction surprises are likely to occur, so when playing speculative options or futures, we will know the direction where a surprise trend turn is most likely. Knowledge of the primary trend is also useful for trading. In this case, we can be more aggressive when entering a position in the same direction as the primary trend, and less aggressive when entering a short-term trend play against the primary trend. Again, we find this helpful in our Platinum Trading subscription program.

Dow 20-Month MA versus 40-Month MA

Next, we look at the above chart as a confirming indicator of the Primary Trend Indicator shown on the previous page. It is a comparison of the position of the 20 Month Moving average versus the 40 month. A little history: On February 28th, 2009, the 20 Month/40 Month Spread went negative, which was the first time that happened since August 2004. In February 2009 the 20 Month fell 145 points below the 40 month, down from May 2008's peak positive 1,026 spread. It worsened to negative -345 March 31st, 2009, to negative -751 in May 2009, and worsened to negative -1,723 in March 2010. It moved to a positive reading February 2011, at + 26, confirming the May 2010 Bull Market Signal and remains positive at + 963 in November 2012, however has declined the past four months, which could be an early sign of a coming primary trend reversal. What is helpful about this indicator, is that once we get this indicator's confirming "buy" or "sell," we can look forward with high confidence to a large chunk of the primary trend's move still being ahead of us.

For example, the 20 month MA crossed below the 40 month MA in February 2002, with the Dow Industrials at 10,106. From that "sell" signal point, the DJIA dropped 2,909 points, or 28.8 percent. That suggested a great spot to purchase Leaps Put options.

Then, going the other way, the 20 month MA rose above the 40 month MA in August 2004, at DJIA 10,174. The Dow Industrials then rose 4,106 points, or 40.35 percent. Here, your strategy could have been to either play long-term leaps call options, or buy a leveraged stock ETF such as UDOW, to simply go long in the cash stock market and stay there, in other words, increase the percentage and amount of your long stock investment position.

After the February 2011 Bull Market confirmation, the Industrials have risen 1,070 points.

There were no false crossovers or cross-unders with this confirming 20 Month/40 Month MA measure. Once it turned negative, the trend was down. Once it went positive, the trend was up. Short-term countertrend moves can occur within the primary trend.

We will be giving our subscribers a Conservative Portfolio model to deal with this coming mega-Bear Market the first of the year 2013. We will show where Gold fits in defense against this coming economic disaster.

 


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"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."

John 6: 35, 38, 40

 


 

Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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