Securities Research Services

Monday, April 28, 2008

Market Leaders Gave Buy Signals Friday

One of the best metaphors for trading stocks is the example of an airplane pilot navigating his or her way through conditions of low to zero visibility. Pilots must learn to trust their instrument panel readings during these harrowing times and to ignore their own human instincts. Human instincts are distorted in this environment and following them can have deadly effects. The pilot must make decisions based on what the instruments are telling him not what his gut says.

Trading is just like that.

Currently, the market is facing overhead resistance that looks formidable. A normal gut instinct in this situation then would be to go short or at least avoid long positions.

But what is the instrument panel telling us here?

Interestingly enough, on Friday the instrument panel kicked over into a strong buy signal in those same sectors that have been leading the bullish side of the market for over the past year at least. Agriculture, metal, energy, and rail stocks moved higher out of thrust pullback patterns en masse Friday.

Jesse Livermore once noted that the greatest mistake he made early in his successful trading career was to grow bearish on the entire market after a few major sectors had broken down. Ignoring the fact that bull markets can exist in sectors during broad bear markets, he experienced a great deal of pain trying to go short and/or missing strong moves.

Right now the gut tells us "Heavy resistance is overhead in the S&P! Caution! Caution!" And while it's true that even the leading sectors get hit when the S&P takes a hit, there is something else to keep in mind:

Remember that little move higher between April 14 and April 18? Some very nice gains were accomplished in energy, metal, ag and the rails during that move. A similar market move higher, even if it takes us smack into strong resistance, can be accompanied by some very nice gains in the leading sectors for those traders who are willing to ignore their guts and pay attention to the instrument panel.


Overhead resistance, which we have highlighted lately, continues to loom large. Contradicting this, however, is the fact that stocks that have been leading the market over the past year or more, are breaking out of pullback bases on strong volume.

Does overhead resistance cancel out the buy signals in the market leaders? Only hindsight will answer that question.

Resistance is only an area where prices might turn back, not where they are obliged to turn back. Prices can, and always do, do whatever they want.

As of Friday, near term signals all switched back to buy, overhead resistance be damned.

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