Since last September, the Bears have been waiting  for their day in the trial court of the Stock Marktet, and this coming week is probably going to be the time when their long awaited test will finally come to its fruitful test. In this unusual venue, the judge in control of the trial is going to be that of history and  of the hard core actions in the Market itself. The judge's main determination will be to decide who is right, and to make an assessment,  through the buying and selling of stocks on the Stock exchanges, as to whether the Bears' evidence can stand up to the test of time. For some,  the evidence is pretty impressive. Let's review and summarize what the Bears are asserting in their view of what is to come next in the US Stock Market.

Ever since late July, the Bears have been watching the chart of the S&P.  From their perspective, it  now appears on the chart that the S&P index has been in a long, slow topping mode. For those who like to utilize and watch charts, the Bears claim that the S&P is  forming a typical head and shoulders pattern. On the left side of the head and shoulders is its starting point, somewhere near or at 900. According to the Bears, the left side of the shoulder started its formation first, when the S&P hit its temporary high in late September at 1080.  Then stocks began to retrace a bit,  and the S&P reached its near term low for the left side of the shoulder at 1020. This phenomenon occurred in the early part of October. From there, the S&P started its accent again, and from there, it moved up to its high at 1100. According to the Bears, this high at 1100  was the top of the head and shoulders formation. From there,  the S&P started down again in a classic retracement pattern and  hit what they say is the bottom of the right shoulder two weeks ago at a  low of around 1030. This occurred in late October. Last week, the bears say,  the Market started its final move up to what can only be described as the tip of the right shoulder. The Bear's goal for the completion of this pattern is 1080 on the S&P. Should we reach that goal, they say, and then stall out , as the pattern would suggest that the S&P will do,   then the index will inevitably begin moving downward and the dye for the future will more or less be cast.  According to the Bears, more than likely, the S&P will start its descent move back first to 980, and then downward again to complete the pattern at or around 900. 

Added to the Bear's arsenal of weapons in their description of the formulation of this topping  pattern on the S&P is the reality of S&P volume. As the left shoulder and head have formed in this pattern, they say, trading volumes have been dropping on each successive ascent and its respective decline.  This information cannot be denied. Trading volumes have indeed been dropping, giving the Bears some additional support for their case.

So what is going to happen this week or in the coming weeks in regard to this Bear case in the US Stock Market? Is the S&P going to move up to 1080, stall, and then start its slow descent towards the 900 level? Or, is this argument wrong?  No one really knows.

My suggestion is that investors watch what the S&P does in the next ten trading sessions. If, indeed, the index moves up to the1080 level and stalls, investors need to be ready to change their long term positions and turn swiftly to shorting the market for the next few months. But if the S&P blasts through the 1080 level, and then again through the 1100 level too,  investors should get ready for another hard move upward on the S&P towards 1200. The only real resistence for the index above 1100 is at around 1135 and 1190.  My personal guest is, if we break through 1100 and reach those higher levels, the Market will have no trouble at all moving through them. In that scenario, we could easily see the market move above the 1200 level by the end of December.

So what is going to happen at the trial in these coming weeks ahead? Like I said before,  no one really knows. Ironically, investing in this kind of situation basically comes down to a matter of personal faith.  I'm not talking about faith in the sense of religion or anything like that. No, I am talking about an investor's faith in what he or she sees and understands about the Market. If you happen to have faith in the recent positive signs of  the many economic indicators out there and also in the government's many ongoing economic stimulus programs, then you will tend to look at everything out there and think that the next move for the Market is going to be up. If, however, you have no faith in the economic indicators and feel confident that the economy is starting to retrace to levels of GDP like the ones we had last fall, and you also feel a great deal of doubt about the real impact  of the government's many ongoing stimulus programs, then you are probably going to be shorting the market in the next two months. Only time will tell whose faith, in fact,  is born out by history. But isn't it interesting how faith plays such a central role in both investing and in the choosing of certain trading strategies with regard to the Stock Market! Think about it. What is your faith telling you now? To a great degree, time will either support your faithful stance or  time will tell you that your faith has been wrong. It all depends on what investors do in the next few weeks in the trial court of the  Market place. 

John K. Brackett, Ph.D.

All Rights Reserved

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