A Dream Come True

The Market Did It!

Santa finally arrived to deliver my gifts. Friends joined the party, short-term momentum gained steam and as is common in bull markets, bears got caught in some vicious bears traps.

By Tuesday (January 14th) we saw confirmation that breadth had climbed back above 30%. The following morning, the market gapped up above the synthetic 5-day moving average, completing my checklist and shifting my tactical perspective back to opportunistic.

My main focus is not tactical (short term) setups but I think it’s important to share an actionable framework that manages risk before adding positioning back during an underlying bull market.

This week, I want to emphasize the importance of having time frame alignment in your investment framework.

The market can be traded across so many timeframes that it’s possible for three people to have entirely different outlooks and all be correct.

The short term feeds into the intermediate term, which then leads into the long-term trend.

Now that the tactical (short-term) timeframe has flipped back to bullish, the next step is for that momentum to translate into the intermediate time frame, eventually realigning with the underlying long-term uptrend. Currently, we’re in a bit of a “no man’s land” above $580 but below the key psychological level of $600 which could result in some choppy action.

With earnings season set to accelerate, a decisive move either above $600 or below $580 would provide much clearer risk/reward scenarios for the intermediate-term trend. As I’ve mentioned, the longer-term trend remains upward, and that should be our default expectation for how this resolves.

But for now, clean risk management for the intermediate term against the $580 area.

Another example is using breadth to gauge how the “Market of stocks” underlying trends look let’s compare the percentage of stocks above their 20-day moving averages versus their 50-day moving averages.

The shorter-term 20-day metric is back on track, the real goal is to see stocks move beyond that and climb back above their 50-day and eventually their 200-day moving averages.

This is the process of a trend change or trend alignment.

Right now, we’re not entirely out of the woods from an intermediate-term perspective. While I’m feeling more opportunistic, I’m fully aware that the market could still make a lower high, a reality we must understand as we navigate this phase.

While stocks had a strong week and my tactical checklist is complete, the intermediate-term trend remains mixed. Expecting a smooth ride back to all-time highs feels like fool’s gold. Risk management is critical here and setting trailing stops on tactical positions is essential, as the possibility of a lower high still looms.

Stay vigilant and remember, the market owes us nothing. Cheers!

I’ve got a special report coming out this weekend.

I’m ripping through EVERY chart in the S&P 1500 and curating my favorite 50 in a massive chart bonanza report (should hit your email Sunday).

With the long weekend ahead, I’m dedicating the time to go chart by chart because that “feel” for the market is absolutely priceless to me.

Cheers,

Larry Thompson, CMT CPA

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