JDH Predicts a Near Term Top (So Probably Time to Buy)

by JDH on January 21, 2012

I am writing to you today from beautiful Ellicottville, New York, where my family and I are skiing for the weekend. Here’s my report: It took no time at all to cross the boarder. In fact, I think we got through quicker than the people in the Nexus line. There was almost no snow in Buffalo, which is very unusual. On Friday afternoon there were ice patches and patches with very little snow on the hills. Again, very strange for this time of year.

However, I am pleased to report that a big storm hit the entire north east United States, and there should be about 5 inches of new snow on the hills when we head out shortly (Saturday morning).

I suspect, however, that none of you care about ski conditions, so rather than showing you a weather map, let me show you an economy map:

As you can see, there are three obvious resistance levels on the S&P 500: 1345, 1353, and 1363, representing the successively lower highs in May, July and August of last year. If the market can’t get over these highs, we are still in a down trend, regardless of what you read in the media.

The astute observer, however, will observe that the high on October 28, 2011 was 1,285, which certainly appeared to be the next lower low. Of course, it wasn’t.

So now we get to sit and wait to see whether be get back up about 1345, or not. (We sit at 1315 today).

For interest sake, here’s the same chart, from the period 2007 to 2009:

Interesting. We had a series of lower highs starting with the all time high on October 8, 2007 of 1562, followed by a number of lower highs, culminating, of course, in the crash that took the SP 500 down to 683 on March 2, 2009.

By the numbers, from the top on October 8, 2007 to the start of the crash on September 15, 2008 was 343 days, and the market was already down 20% at that time, before the subsequent bottom 56% lower, and 511 days from the peak.

As of today, we are 280 days from the April 15, 2011 peak, only down 4%. Where will we be another 50 or 60 days from now? Who knows, but past history tells us that the market can certainly go up from here, but it could also get the living crap kicked out of it and go surprisingly lower from here.

Which is why, on Wednesday January 18 I posted on the Buy High Sell Higher Forum my prediction:

Intra-day we will see 1350 this week, and that will represent the high for the year.

Well, I guess I didn’t get that one right, as for the balance of the week there was very solid resistance at 1315, and we never crossed through it.

However, the RSI is now just under 70, the highest level since May, 2011, which was the start of a lower consolidation period, before the big drop.

I will stand by my prediction that we have seen the highs for quite some time (a prediction that will no doubt be proven incorrect next week). I am not predicting a crash next week. But, as past history shows, we could be considerably lower a few months out.

The only fly in the ointment is that 2012 is an election year in the now snowy USA, and I assume the incumbents will do everything in their power to prevent a stock market crash just before election day. The last crash in 2008 was just before election day, and we all know how that turned out for the party in power.

Enough of my idle speculations. I’m off to ski; see you next week.