The Big Picture - A Five Year Chart of the Market

Yesterday, I talked about the big picture in terms of the decade.

Another big picture to consider is a five-year chart of the stock market. One of my favorite sources for a five-year snapshot of the market is clearstation.com. The site is wonderful in that it is user friendly, filled to the brim with charts and graphs, and contains ongoing commentary about market conditions. It is a treasure trove of knowledge. I may check clearstation.com 5 to 10 times a day.

Anyway, if you go to clearstation.com, you will immediately see their dashboard. At the upper left-hand corner in blue is the "Real Time Market Diary." Then you will see "DJ30," "NASDAQ," and "S&P 500." Double-click on "S&P 500." Great. You now have before you an invaluable road map for understanding market action. You will immediately see where the market has been, where the market is today, and, with a little experience and observation, where the market may be heading.

At the top of the chart above the red and green bars, you will see "Range" followed by various time increments. Double-click on "5yr." You should now see a five-year chart for the S&P 500. (And remember that the S&P 500 Index is the best proxy for a diversified portfolio of stocks and the C Fund.) The chart should cover the years 2006 through 2010. Notice how the market went up into October of 2007. The market fell into March of 2009. Then, the market rose to its close today @ 1169.77

I consider this chart even more valuable than a general roadmap for the decade. I am about to get a little technical but not too much. Just remember that the market has a psychology to it. It tends to move in waves because of the herd instinct. When investors are afraid, everyone runs for the exits. When investors are feeling warm and fuzzy (as they are right now), then investors become complacent.

The market moves in five waves, regardless of whether the market is moving up or down.
This is priceless information to know because it keeps you from being greedy right before the market is about to fall. And it will give you courage when the news is bleak and you are reluctant to move 100% into the C Fund. So, the market falls down (1), it rises (2), it falls down again alot (3), it rises alot (4), and falls for the final time (5). This is known as Elliott Wave theory but I want to keep things simple for now.

Look at that five-year chart very, very closely. What do you see?

I see a market that moved down from October 31, 2007 to March 16, 2008. (1) Then the market moved up into June/July of 2008. (2) At the time, I knew that another fall was ahead of us and that is what happened into March of 2009. (3) The market then rose to where we are today. (4) I am cautious about the immediate future because I am anticipating fall number (5). It may not happen. But if the fall does happen, it would likely begin to fall when the market reached its bottom level in March of 2008.

This five-year chart tells me that alot of investors are trapped. These investors were buying the dip in March of 2008 and they were proven wrong. At the least, I would anticipate that the market's advance would come to a halt at the March 2008 low. So, I would be prepared for storm clouds as the S&P 500 Index approached the March 2008 low. This magic point would be 1256 on the S&P 500 Index.

That would be a signal to move 100% into the G Fund until the storm clouds had passed.

In other words, the support level on the way down in March of 2008 has turned into resistance on the way up until proven otherwise.

Five-year charts are a good way to see what might lie up ahead.

As I used to tell Joel, investors lose out because they look into the rear view mirror. They believe the past is the future. Instead, the key is to see the road ahead. Past support on the way down will become future resistance on the way up.

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Market Conditions for October 12, 2010 - Today, the market continued its advance. It was a typical Bullish day. Prices dropped in the early minutes of the trading day but then recovered to close higher than the day's open. This is Bullish. It is always Bullish when the day's high is higher than the day's open. Resistance @ 1172 was touched and then rejected. The next level of resistance is @ 1196. In a future post, I will explain why this level is probably a good level to move 100% back into the G Fund.

When the market goes down, there's no point in sticking around the C Fund.

Have a Good Evening!

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