Sunday Homework

I use Sundays to do my homework on the market. I think about the past week and try out alternative scenarios for the coming week.

Last week's behavior is consistent with scenario #3. (See my Interview with "Shelby Aldrich," Part III) From a low of 1176 on November 30, the market has gone up non-stop to 1240 on December 10. As a result the retail public is happy. They will review the week's performance and, I suspect, project last week into the future. Anything can happen in the market but I don't think the market will accommodate this point of view. We stopped dead @ resistance at 1240. There is multi-year resistance @ 1257. In my experience, resistance is not taken out on the first drive. The market will retreat and then try again later. It is the third attempt that succeeds. I also was looking for the market to close @ a round number and it did so @ 1240. Round number closings on Friday provide maximum hope to the public of further advances. In my experience, they are a better sign of a decline ahead by Monday's close. In the market, professionals expect that strong Fridays will be followed by strong Mondays. When this pattern is broken (i.e. Monday closes lower), this is an important flag to professionals that the short-term trend has changed. So, I will be particularly interested in the close on Monday and whether it is lower than the open and/or Friday's low.

There tends to be a large inflow of money into the market on Mondays. As a result, Mondays are now given the nickname "Mutual Fund Monday." So, the expectation is the market would go up on Monday. If the market doesn't go up and acts contrary to the expectation for Mutual Fund Monday, then this would be another sign that the short-term trend has changed.

In my mind's eye, I can imagine an open @ 1240, the market drifts up to around 1249 based on the flow of Mutual Fund money in the first hour of the trading day. I am thinking a day that begins like June 21. Then, the market sells off after the first hour of the trading day. The Trin reading is heading higher, which suggests a bearish tone to the day. Professionals (who don't have to slep off to work at 7:30 a.m.) are watching and waiting for the opening price of 1240 to be breached. That will be the sign for the more aggressive traders to start shorting the market. When Friday's low is breached, then the short-term reversal in trend is evident to all.

Even if I am Bullish on the ultimate direction of the market into the end of the year, a Friday close @ overhead resistance is bearish in the short-term.
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There is a book that I'm going to read over my Christmas break. According to the Stock Trader's Almanac 2011, the best investment book of the year is Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman. Lehman argues that "the stock market is not entirely random" and its patterns, cycles, and trends "can be explained within certain parameters." That sounds like a good argument to me.

Have a pleasant Sunday!

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