Before looking forward, let's take a quick look back to help understand how our longer term supply and demand analysis works. Back in March of 2009, the S&P was reaching a significant demand level as seen on the monthly chart below. I alerted the Extended Learning Track (XLT) program members on March 4th and we took long-term action on the buy side. When we looked at the profit margin at that time, it was significant, giving us an ideal risk and reward scenario. When we assess profit margin by way of charts, we look at the distance between the "fresh" demand level and the "fresh" supply level. Back in March of 2009, the distance from that demand level to the supply level seen on the chart was huge. Below the chart is an email and statement from one of the many XLT members who took action and bought into the stock market back in March 2009. His action specifically was to buy a basket of stocks that were also reaching larger time frame demand levels. His email was sent two months after we pointed out the buying opportunity at larger time frame demand and already, he had some nice double-digit percent returns going. The key to attaining the low risk, high reward, and high probability entry into the market, however, was timing the market based on real supply and demand analysis. Stepping out of our XLT world, the Wall Street experts tell the public "You can't time the market." Obviously, I don't agree with that at all. Perhaps they tell the public this because Wall Street would generate fewer fees if the average person believed they could time the market. Or, perhaps Wall Street says this simply because they don't know how to time the markets' key turning points themselves. Maybe it's both, who knows and who cares.
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Fast-Forward
Now, let's fast-forward to today, thirteen months after that market bottom. As you can see from the monthly chart above, price is not that far from a significant supply level which is where we would expect prices to not only stop rising, but also decline. Could I be wrong? Sure, but I am just as confident in that market call as I was picking the market bottom last March. Also, if I am wrong and price just rallies past that monthly supply area (I would be very surprised), we can simply buy pullbacks to new demand levels. That area of supply on the monthly time frame is large. What we often do in the XLT is investigate larger time frame levels by looking at those areas on smaller time frames. This is similar to when a doctor takes an x-ray of a broken bone. For example, they never take one picture when taking x-rays. If you break a bone in your elbow, they are going to take two or three pictures. When you look at each of these pictures separately, they look different but, it's still the same elbow.
Below is a weekly chart of the S&P (SPY – S&P Exchange Trader Fund, ETF). Looking inside that large monthly level, we see two clear supply levels on the weekly time frame. The lower (proximal) one is not far away at all and the upper (distal) supply level is sitting just above. The chances of price moving up past both of these levels any time soon is not likely.
Fast-Forward
Now, let's fast-forward to today, thirteen months after that market bottom. As you can see from the monthly chart above, price is not that far from a significant supply level which is where we would expect prices to not only stop rising, but also decline. Could I be wrong? Sure, but I am just as confident in that market call as I was picking the market bottom last March. Also, if I am wrong and price just rallies past that monthly supply area (I would be very surprised), we can simply buy pullbacks to new demand levels. That area of supply on the monthly time frame is large. What we often do in the XLT is investigate larger time frame levels by looking at those areas on smaller time frames. This is similar to when a doctor takes an x-ray of a broken bone. For example, they never take one picture when taking x-rays. If you break a bone in your elbow, they are going to take two or three pictures. When you look at each of these pictures separately, they look different but, it's still the same elbow.
Below is a weekly chart of the S&P (SPY – S&P Exchange Trader Fund, ETF). Looking inside that large monthly level, we see two clear supply levels on the weekly time frame. The lower (proximal) one is not far away at all and the upper (distal) supply level is sitting just above. The chances of price moving up past both of these levels any time soon is not likely.
Figure 4
The News
The news is an interesting ingredient in our analysis as well. If you remember back in March of last year, the news was not good. In fact, if you listened to it even a little, we were being told that the world was basically about to come to an end. We had the worst jobs reports since 1945, home foreclosures were at record levels, and AIG was about to cause the global financial world to "collapse" as the government put it. Given this news, who in their right mind was going to buy into the stock market that was in a free fall at the time? The answer is this: Anyone who understands two simple facts was very excited to buy into the stock market:
1. Understanding how you make money buying and selling anything. The only way to obtain consistent low risk, high reward, and high probability opportunities in the markets is to identify market price turning points in advance and buy low and sell high. In other words, buying at "wholesale" price levels and selling at "retail" price levels.
2. Understanding how to quantify and qualify supply and demand in a market with a price chart. This is the key to identifying those market turning points in advance.
Now, think about the news in general today with regard to the economy, corporate earnings, upgrades and downgrades, and more. Overall, it's good and getting better each week. Real bad news and price at or near demand (wholesale prices) equates to a turn higher in price. Real good news and price at or near supply (retail prices) equates to a turn lower in price.
Conclusion
Back in March 2009, considering best use of investment capital and opportunity cost, it made clear sense to allocate funds to the stock market. Today, at current stock market prices, I would not expect anything close to the same returns from the stock market that the past thirteen months has delivered. Is price likely to revisit the March 2009 lows? This is not likely in the near term. When we look at that thirteen month rally on the weekly chart, we see that some demand levels were created on the way up. The price charts contain all the information we need when you know what you're looking for and at. The trick is to keep your analysis "real" and "simple." People, in general, have a very hard time accomplishing one of these tasks, let alone both of them together. This leads to another very quantifiable equation... Those who can accomplish these two tasks simply derive income and wealth from those who can't. If you feel you need help with this, start by reading my piece from last week, "Free Resources to Help Gain an Edge," which will lead you to plenty of "free" information that should help you. If that is not enough, send me an email and we will take it from there. As for the markets and longer term predictions, we will revisit them when the charts tell us a major turn in price is likely.
Hope this was helpful, have a great day.
The News
The news is an interesting ingredient in our analysis as well. If you remember back in March of last year, the news was not good. In fact, if you listened to it even a little, we were being told that the world was basically about to come to an end. We had the worst jobs reports since 1945, home foreclosures were at record levels, and AIG was about to cause the global financial world to "collapse" as the government put it. Given this news, who in their right mind was going to buy into the stock market that was in a free fall at the time? The answer is this: Anyone who understands two simple facts was very excited to buy into the stock market:
1. Understanding how you make money buying and selling anything. The only way to obtain consistent low risk, high reward, and high probability opportunities in the markets is to identify market price turning points in advance and buy low and sell high. In other words, buying at "wholesale" price levels and selling at "retail" price levels.
2. Understanding how to quantify and qualify supply and demand in a market with a price chart. This is the key to identifying those market turning points in advance.
Now, think about the news in general today with regard to the economy, corporate earnings, upgrades and downgrades, and more. Overall, it's good and getting better each week. Real bad news and price at or near demand (wholesale prices) equates to a turn higher in price. Real good news and price at or near supply (retail prices) equates to a turn lower in price.
Conclusion
Back in March 2009, considering best use of investment capital and opportunity cost, it made clear sense to allocate funds to the stock market. Today, at current stock market prices, I would not expect anything close to the same returns from the stock market that the past thirteen months has delivered. Is price likely to revisit the March 2009 lows? This is not likely in the near term. When we look at that thirteen month rally on the weekly chart, we see that some demand levels were created on the way up. The price charts contain all the information we need when you know what you're looking for and at. The trick is to keep your analysis "real" and "simple." People, in general, have a very hard time accomplishing one of these tasks, let alone both of them together. This leads to another very quantifiable equation... Those who can accomplish these two tasks simply derive income and wealth from those who can't. If you feel you need help with this, start by reading my piece from last week, "Free Resources to Help Gain an Edge," which will lead you to plenty of "free" information that should help you. If that is not enough, send me an email and we will take it from there. As for the markets and longer term predictions, we will revisit them when the charts tell us a major turn in price is likely.
Hope this was helpful, have a great day.
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