Ryan R Henry's  Instablog

The past seven months have provided all market participants with essentially a free lunch. Of course, the free lunch was well deserved, considering the historic extent of the market decline that preceded the current seven month advance. Nevertheless, it’s been exceptionally easy to profit in 2009, thanks to the fact that this year’s advance has carried with it record-setting participation. Specifically, market breadth (as determined by advance/decline ratios) and the percentage of stocks that have settled into an uptrend (as determined by the Bullish Percent Indexes) have reached record heights during this move, and that equates to most stocks realizing big and quick gains. But it would be a mistake to assume these good times will last forever. In fact, the longevity of the advance on the major market indexes are being tested right here and now.

 

The importance of the market’s current location is made apparent by using the Elliott Wave Theory. Elliott Wave is a theory that forecasts future movement, based on current price patterns. It can be applied to market indexes, individual stocks, or just about anything that can be plotted on a price chart. “Elliotticians”, or analysts that use this theory, look for specific price patterns to provide insight into what will happen next. All price movement can be categorized as either trending or counter trending movement. If an Elliottician is able to determine the nature of a price pattern, it will provide very valuable answers that can be used to consistently beat market returns. It may sound like the latest fad to succeed in the trading game, but it’s far from it. This theory has been around for over 75 years, and there is a well-established track record of success in respect to forecasting changes in market direction. While many investors chase market news and are then confused when seemingly positive events lead to negative stock movements, the Elliott Wave Theory identifies what is going to occur before the news or fundamentals hit the wire.

 

The current market advance finds itself at an important point in respect to its Elliott Wave pattern. What’s interesting about the current crossroads is that it will bring a major statement regarding price’s direction, either up or down. If the Dow Industrials Average, S&P 500, and Nasdaq 100 indexes continue to advance and move above 10100 Dow, 1110 SPX, and 1820 NDX, respectively, the wave pattern would indicate that this uptrend has significant work to do before it completes. It would be reasonable to then assume that the advance will continue at least into the early parts of 2010. But there’s another side to this coin. This is because the wave patterns of the market indexes are currently at a point where an advance high could occur. In that regard, the wave pattern tells us that price must stay above 9650 Dow, 1045 SPX, and 1690 NDX to keep the uptrend in good health. If these levels are taken out, it could only mean that an important high has been established, and that the 2009 advance has completed. This would portend a market decline that lasts for at least four months, but likely longer. All of this makes index price movement from here all the more exciting.

 

It seems so long ago that the news wire was littered with articles about astronomical oil prices and how alternative solutions had to be accelerated if we were to preserve the American lifestyle. While the latter is no less important now than it was then, a precipitous decline in the price of oil has moved these articles to the back page. It might have something to do with the fact that the price of oil, as indicated by the PowerShares Commodity Trust Oil Fund (DBO), lost over 71% of its value from July 2008 to February 2009. Since that time, oil has recovered in mighty fashion, nearly doubling its value in the past eight months. While it’s been a lot easier to digest the current price at the pump, there’s no doubt that higher prices are being noticed. This begs the question whether we’ll find ourselves skimping on groceries to account for sky-high prices once again, or whether the price of oil will remain a non-topic. Elliott Wave and technical analysis of a price chart of Oil, specifically the DBO, provides concrete answers.

 

If one thing is apparently clear from the price pattern of the DBO, it’s that we won’t revisit the incredibly high levels reached in 2008 any time soon. The decline that took place off the July 2008 is a trending move. The pattern of this decline tells us that the dominant overall trend is still down, and that ultimately, the current advance will prove to be a countertrend move that gives way to lower prices once again. However, this is not a reason to ignore the current recovery. The chart clearly indicates that the mid-term uptrend is healthy, and will continue to seek out higher levels in the months ahead. This forecast is supported from numerous points of view. Most important to my work is the price pattern. The form of the advance off February’s low is constructive, and it is clear that the path of least resistance remains up. The constructive nature of the pattern is demonstrated by the slow, choppy pullback that the DBO had been in during August and September. In addition to the price pattern, Fibonacci Mathematics tells us that higher prices are on the way. Essentially, Fibonacci indicates the retracement levels that a price pattern is drawn to. These levels have not yet been achieved. It is reasonable to expect the DBO to work its way up to at least 31.00, although it’s more likely to move to 35.00 to 40.00. The DBO is currently priced at about 26.00, so no matter how you slice it, a big up move lies ahead – not only on the DBO, but for oil in general.

 

 

Since the 1^st quarter of 2009, it’s been relatively easy to find winning stock trades. Or like one of my trading friends likes to say: A drunk monkey throwing darts could beat this market. If you look at the technicals of the market advance that has been in play since March of this year, it becomes clear why it’s been so easy. The NYSE Bullish Percent Index, which basically tracks the number of stocks on the broad NYSE index that are in established up trends, has hit new all-time highs in recent months. That means that this advance is the most widely-participated up move that has occurred since at least the ‘80s. The current market condition will inevitably change, which means it will become more difficult to nail down the winners in coming months. Fortunately, there’s a proven way to find stocks that are set to outperform the rest of the market. Elliott Wave is a theory that forecasts future movement, based on current price patterns. It can be applied to market indexes, individual stocks, or just about anything that can be plotted on a price chart. At any given time, a screen of the general stock population will return at least a handful of patterns that indicate pending breakouts, as well as a number of breakdowns. These patterns can be singled out and monitored for “actionable” price movement. If the news wire or basic fundamental information on any of these stocks doesn’t provide any surprises, we will be left with a great opportunity for profit.  Here are a few stocks that are poised to outperform:

 

Lifepoint failed to participate in market strength over the summer, but has found renewed purpose in the past two months. A successful test of its 50 and 200-day moving averages leaves Lifepoint at new advance highs, and poised for further strength ahead. As long as price is able to stay above 28.00 from here, this stock will be pointing to the 38.00-40.00 area. From a fundamental standpoint, Lifepoint has shown steady progress in terms of its revenue growth while maintaining reasonable expenses. It is in a growth industry that is less-dependant on economic forces than most companies, putting itself in a position to continue outperforming regardless of overall market direction.

 

In March of this year, Leucadia moved to its lowest price levels in over seven years. Since that time, the stock has doubled, but the outlook remains promising and still holds the potential of 40% gains from here. The company is largely diversified in its product offering, which makes it less susceptible to industry-related fluctuations. Additionally, they have improving fundamentals, courtesy of intelligent business acquisitions and a focus on identifying undervalued companies for purchase or investment. From a trading standpoint, if price can stay above 21.00, trade above 27.00 is expected to trigger a big up move that carries this stock towards 35.00.

 

First American is approaching their 3^rd quarter earnings announcement on October 29^th, and it’s normally a bad idea to trade stocks ahead of such an important news event. But if the stock price can avoid any surprises heading into November, look for FAF to work its way up to around 38.00 in the coming weeks. The fundamentals of the company are not ideal; over the past few years, the company has realized decreasing revenues and profits. But the company is now moving in the right direction, with profits and income steadily increasing in the past three quarters. Further, First American compares favorably to other companies in the Surety and Title Insurance business, boasting strong earnings per share and margins. The key to trading this stock is making sure price stays above 26.00. As long as it does, the play will be to position long once price trades up to around 34.00.