Has the Stock Market Recovery started? -3rd April 2009

As we write the stock market continues with its current rally. 

From a fundamental point of view we cannot really fathom why the market has moved up so far and we have a sneaking suspicion that there is a degree of manipulation in being which is allowing a number of professional fund managers to sell into the rise (and, by so doing, get better prices for their stock sales and also to avoid the possibility of themselves being the cause of further price collapse).

 

We have, over the last few weeks suffered a (exceptional, it has to be said) run of losses after a long profitable period The cause has been two fold – firstly we have selected mainly FTSE 250 (midcap) stocks and secondly, it is those very stocks (and the FTSE 250 index) that have experienced the support of a long consolidation move rather than followed the downward path of the other major indices (including its big sister index the FTSE 100).

 

This can be easily seen from the charts below. Note how it is the FTSE 250 that has refused to follow the other indices down, even though it is, like the others, still in a strong technical downtrend -

 

 

 

 

 

 

 

 

 

The FTSE 250 is now hitting its head on an important technical resistance level (see the analysis below) and that could mean that it will turn over and go back down again, perhaps starting tomorrow.

 

This loss making period in which we have been trapped over the last few months will, of course, end at some point. The methodology of the investment strategy is to use medium/long term trend identification (ironically, so as not to get caught up in whipsawing price volatility) and the lesson of the value of this approach over the last 6 years is that there are periods, such as now, when the markets move in a minor trend contrary to the main trend, which can cause an increase in stop-outs but also that these periods are followed by re-assertion of the main trend or the start of a new trend wherefrom recovery and profits are made. We, like you no doubt, just wish that this is imminent and that this current dismal period would end. What can be certain of is that when the main trend re-asserts itself or if it changes, ShareHunter will be adapting the investment bias to accord with it.

 

In case you are interested, here is a précis of our current analysis of the FTSE 250 index -

 

 

Chart Analysis -

 

The FTSE 250 has now reached a decision point. The question is it going to lead all of the other world indices into an Uptrend or is it a big flash in the pan?

Firstly note how it has moved sideways for several months (since Nov’08) to the point where it is now meeting its 30wk moving average (the red line); when this happens it is nearly always a point of change for the direction of the index. You can see how the index fell away on the three previous occasions that it has met with its moving average during this downtrend.

 

Of course, it could be different this time (at some point the index will cross over and start a new uptrend) but we have to allow that it is likely to fall away for the fourth time, particularly as the other major indices are in steep downtrend.

Another reason why the index is more likely than not to fall away again is that it is also at the level of the three highs of the consolidation move and so it could now make a fourth high at this level. This resistance level is at the 6850 area. (As we write, the FTSE 250 is standing at 6870!!).

 

The volume levels increased during September ‘08 just before the big price falls in October showing that there was a preponderance of selling and the volume levels have fallen off since and there has been no marked price rises or falls. This indicates a balance of sellers and buyers. The future direction of this index will be dictated by how the volume is constructed over the coming weeks.

 

It is also worth noting that there was/is potential for this index to fall to the level of the 2003 low (at the 3800 area) which is exactly what the other major indices (the FTSE 100, the S&P 500 and the DJIA) have already done. In this regard and the length of this consolidation period the FTSE 250 has been a law unto itself and certainly something of a conundrum. But the answer to our title question is “No – not yet, but keep watching this space”.

 

AGS

ShareHunter

03.04.09