> HS Dent Forecast Update
> Thursday, July 16, 2009
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> We have provided many updates recently to prepare you for a potential turning point in the markets and sell signal early next week. There are two likely scenarios at this point, but they are quite different. The first is simply that we rally back to the recent highs and this bear market rally peaks in line with our long expectation for a sell signal in mid to late July. This would be more in line with scenario 1d from the June and July newsletters, but with slightly lower targets back around 8,870 on the Dow and 956 - 958 on the S&P 500. Our oscillators are getting quickly overbought on this rally and Lowrys buying and selling pressure indicators suggest this rally has been losing steam since early May and will be short-lived near term. Hence, we could see a top as early as next Tuesday. The likely scenario near term would be a pullback tomorrow back to around 8,600 and then a final surge to 8,870 or so into next Tuesday or Wednesday.
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> The second scenario would be that the markets retest the recent highs next week, pullback for days or weeks and then break to new highs. The reasons behind such a move would simply be that there is a lot of money sitting on the sidelines from institutional investors and a break to new highs would cause a panic to get back in as well as a second round of short covering -- from those holdouts still skeptical of this bear market rally. The 956 to 958 level on the S&P 500 is especially critical because it would retest the neckline (from the last high at 956) of the right and final shoulder of a potential reverse head-and-shoulders pattern that would suggest much higher prices - over 11,000 on the Dow! Hence, a convincing break above 958 would likely encourage sideline money to get back in and would certainly call the bluff of the last short sellers and force them to rebuy to cover their shorts.
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> Both of these scenarios are compelling as they would be more unexpected -- the first bottoming a little lower than would be anticipated (just below the strongest resistance at 9,100 on the Dow) in past similar bear market rallies, and the second going much higher which would totally wear out the shorts and bearish skeptics. This market has continued to defy expectations and most technical indicators as there is so much confusion even with the "smart money" over this rare economic meltdown. But we are increasingly favoring scenario 1 due to the weak buying pressure from Lowrys and given that a more explosive rally would seem unlikely here, especially given how oversold our technical indicators are getting again. However, if a break above 958 on the S&P 500 forced a stampede back in for institutional investors, then Lowrys buying pressure indicators could come back to life.
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> Hence, both scenarios are still clearly possible depending on how good or bad the news is on the economy in the coming weeks and months, and how the technical indicators evolve. But the key test will again likely be if the markets can push convincingly above 958 on the S&P 500.
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> We are clear on two points: this rally definitely has more of the characteristics of a bear market rally than of a new bull market, even beyond our many longer term and intermediate term cycles turning down especially from late 2009 into 2010 and beyond. We would clearly not suggest being in the stock market past early September unless the markets are still rising without any signs of oversold conditions, which would be very unlikely. The key question is whether to play it safer and get out near the recent highs near term, or to hold out for potentially substantially higher highs into as late as early September. Simply put, the question is, “Why hold out for 5% to 20% higher gains if the downside is 50% to 80% from here?” The best answer is, if you can, to be more flexible and play both ways!
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> The best way to play this scenario is to sell partially or fully if we do hit 8,870 or 956 - 958 on the S&P 500 next week. Then a pullback would be likely and you can rebuy if we break convincingly above those levels. If we don't break to new highs, then you will be rewarded for being out. If you do rebuy, then sell again when the technical indicators get extremely overbought or by early September at the latest. The markets are not going to make this easy as they have not since October of 2007. Our technical indicators are not going to work as well as they did from late 2002 into 2007. We are well aware that a lot of financial advisors and investors do not like to make too many short term moves. But you have to think a bit more like a trader in this volatile market and with such a key turning point likely between late July and early September.
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> We will continue to comment into next week depending on how our technical indicators evolve in this short term surge.
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