Sunday, October 26, 2008

Long-term investment

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In my last "S&P 500 Chart" post the technical indicators were positive. We still had the positive market on Monday, yet, on Tuesday the sentiment turned into the bearish and by the end of the week we had third attempt of the market to break the October 10, 2008 bottom. The Nasdaq 100 index did pass this support level, however the S&P 500 and DJI indexes stayed above. One more time I would highlight the importance of monitoring chart on the daily basis. In such volatile market the sentiment changes very fast and if you are not watching, your yesterday's winning trade could be in deep loosing situation today.

I have already mentioned two weeks ago in my "Stock Market Crash Analysis" about the importance of the high volume surges. Now, you may see that I was right and the high volume surges did mark the support on October 10, and this level has become very sensitive for many investors.

What we see now looks like normal market behavior in the support corridor:
  1. The market hit the Bottom on October 10, 2008 and high volume surges reveal us that a huge number of panic sellers left the market by selling their investments. The volume was extremely big and it tell us that the same big number of shares was bought by other investors (volume is always two side transaction - if somebody sold then somebody bought from him).
  2. Those investor who bought on October 10 did not sell yet - we have not seen any volume during the price advance that would be even close to the volume surges on that day. That means that those buyers are still in the market and they are not in panic yet. Their positions are not in the red zone - the indexes did not drop below October 10 lows.
  3. It looks like not all traders who are in fear were hit on October 10. Many of them started to sell after October 14 when they saw better price to cut losses, by pushing the market down to retest the support level.
  4. On October 14 again, new investors decided to start buying at bargain and again we saw volume surge which was, however, smaller than the one on October 10. That tell us that there were no as much panic sellers as before.
  5. And again after October 20, another panic seller who still did not cut losses started to push the market down.
  6. And again we see smaller than before volume surge that stopped them at support level on October 23, 2008.
So, what's now? The market may go up, there are not a lot of sellers who is in panic - big part of them already left the stock market on October 10. The market can continue to fluctuate around this support level until all who is in fear leave the market and more traders become attractive by low priced stocks. Or, we may see a new surprise from Government (as we had before with bailout) which may push market again deeper down.

I will repeat one more time what I was repeating over the past two weeks. This is a good time to invest into pension - for a long term. The stocks are underpriced and sooner or later thy will cost much more. Some of the stocks could double or even triple over the couple of years. Of course it's bad idea to invest all you have now. You may divide it in 2-3 portions and if the market is still going to drop you just wait for another volume surge and invest another portion of your portfolio into IRA or 401k. This is very simple principle of long-term technical analysis - Every time the stock market crash and you see big volume surge you start to invest.

Tomorrow, I'll try to post a chart.

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