Camel Back

Market action today was an undulating camel's back. The market soared to a high at 12pm only to continue lower after lunch. This beautiful camel back shape seems to be a rare sight.

Anyway, the market has broken the 3200 mark. Current trends in the 1-year chart seem to imply that there is further uptrend. The lines suggest that the market has entered the second wave in its upswing. Considering such a trend, previous speculations by analysts of a V-shaped or U shaped recovery seem to be possible. If that is the case, we can expect to see about 5 months more of bull market to go. The basis for this is that the market started its decline from October 2007 and this lasted until March 2008. This gave it an approximate 6 months of bear market. Negative serial correlation suggests a general bull market in the 6 months after, March 2008 to September 2008.

Even though the 6 month outlook may look good, care must be taken in stock-picking. Some stocks have been captialising very quickly on the current upswing and hence may reach their peaks prematurely before the general market does.

A general way to judge whether or not a counter falls into the above category, is to look at its bottom support (lowest possible price for the moment) and upper barrier (highest possible price for the moment). Estimates can be done from looking at the past highs and lows. The way to use these values is to use them as limits of the counter movement together with, the price where the counter is now. For example, a counter has a bottom support at $5 and a barrier at $10, if it is $8 now, there is lesser upside than downside (+$2 and -$3). If we vaguely put our judgment accuracy at 50:50, then our expected return will be, E(X) = 0.5(2) + 0.5(-3) = -0.5. This means that you probably may not be able to make a good return considering the risks. You should not buy the stock. When E(X) > 0, the risk you take is justified and you have a better chance of success.