PHASES & CYCLES®
THE NEW YEAR BEGINS ON A POSITIVE NOTE.
We would like to wish our subscribers a healthy and
prosperous 2012.
While observing the way the media portrayed 2011,
one would get the impression that it was a year to
forget. But was it that bad? Certainly there were
large doses of dramatic events on the economic and
political fronts: the Euro-zone saga, rising debt,
political and economic instability, and social unrest,
to name just a few. However, despite all the chaos
and negativity, the North American markets
finished the year much better than news sources
reported. In fact, the S&P 500 remained flat
throughout the year, reconfirming our belief that
investors must go beyond headlines and
fundamental reporting to succeed in this market.
For answers, they must turn to the market itself.
There is no better way to “read” the market than
through technical analysis. While the market
volatility and negative atmosphere discouraged
many from participating, those who filtered out the
market noise and focused on strong stocks did quite
well. It was technical analysis that kept us away
from stocks such as Royal Bank or Sino-Forest and
it is technical analysis that lets us begin 2012 ready
and prepared for new opportunities that are
emerging as we write.
What’s ahead in 2012?
The S&P/TSX composite entered 2012 in the worst
shape of all the North American indices and while
Toronto still has a falling 200-day moving average
(200dMA), there is light at the end of the tunnel,
although a lot more base-building will be required
before a full reversal.
The U.S. indices appear one step ahead of their
Canadian counterparts. The rally of the last few
days rose above the downtrend line and brought
the DJIA and the S&P 500 above their 200dMAs.
The 50dMA of the DJIA rose above its 200dMA this
week, a positive development, and the S&P 500 is
not far behind. The indices must fortify their
positions above their 200dMA and these MAs must
turn up decidedly, just as the Exponential Averages
have done recently.
Where are the markets heading now?
The rally of the last few weeks has been impressive.
The most recent lift above the 200dMAs came on
the back of a new 21-day cycle, which, together
with the longer 105-day cycle should mature
around January 20th. Therefore, it is important to
watch the market’s ability to build on the recent
strength. Both markets could weaken toward this
maturation date, but what happens next will set the
tone for the entire 2012. A weak start to a new
105-cycle could put the North American markets on
a weak path. However, our preferred outcome, a
decisive rally in February on the back of the new
105-day cycle would put the U.S. market well above
the major trend gauges, would turn the 200dMAs
up and even help to send the Toronto market on a
recovery path.
Where should investors concentrate?
Careful selection of stocks that display strong
technical characteristics should continue to be the
best strategy. It is a boring but effective method of
resisting daily market noise. Focusing on stocks
that are in clean uptrends or are breaking out from
lengthy base patterns should continue to bear fruit
this year. For many it may come as a surprise that
despite the market tumult, strong stocks exist. Last
year proved once again that technical selection
works and produces profits despite a weak market.
Look for our up-coming stock reports for selections.
Such a selective approach is a win-win
situation because even if the markets
continue to tread water, strong names
should still provide the best protection.
On the other hand, if the market decides
to surprise us in 2012 and stage a strong
rally, the same technically sound names
will still lead the markets higher. As a
general rule: strong stocks usually remain
strong and vice-versa.
PAC-12-003; MKT-281; January 10, 2012 Olaf Sztaba, Ron Meisels