posted on 16 March 2016
by Keith Fitz-Gerald, Money Morning
FOX Business Network host Stuart Varney cut right to the chase recently, asking me within seconds of the market opening:
You short the weakest companies - meaning you bet on them going down - and you buy the strongest companies because they've got what's needed to survive turbulent market conditions.
But, today, I want to tell you what I couldn't say on TV.
Right now I'm watching a key technical indicator we've seen only do what it's doing now twice in the past 22 years. What's more, this same indicator has heralded radically different market conditions than most investors expect both times it's appeared.
And some whopping profits for investors who recognized it, too.
Today I want to tell you what "it" is and share a company that's poised for profits as a result.
Here's what you need to know...
It's All About the Numbers
Many investors are at least vaguely familiar with the concept of technical analysis, especially when it comes to something called a "moving average."
If you're not or you're just joining us, technical analysis is the use of statistics to analyze market activity. In contrast to fundamental analysis, there's usually no attempt to determine an intrinsic value but, rather, what happens next.
And that's where moving averages come in.
Moving averages are one of the simplest technical analysis tools out there. Nearly every charting package and financial site has them built in, which means you can add them to any chart on almost any investment any time you want.
What I like about moving averages is that they're great at smoothing out variations in daily prices. Put another way, they eliminate noise - the stuff that confuses everybody else.
Lately I've been watching the 21-month and 10-month moving averages very closely.
I like the 21-month moving average because it captures a long enough time frame to be really useful in determining mid-range trends, but short enough that it's still responsive when it comes to recent bullish or bearish market action.
I find the 10-month moving average is particularly helpful as a means of identifying support and resistance, but also important trend reversals, especially when you combine the two on a single chart.
And that brings me to the indicator...
The S&P 500 closed at 1,932 on Feb. 29, which means that the 10-month moving average crossed below the longer-term 21-month moving average for only the third time in the last 22 years.
At the same time, the 10-month moving average crossed the 21-month moving average at a time when it's peaked. Technical analysts call this a "bearish cross" because the implications are decidedly negative - even though the markets enjoyed a sizeable rally for at least some of last week.
You can see the current cross very clearly in the following chart, as well as the prior two crosses. And you know what happened next.
Fortunately, you're not out of options if the markets are turning, or even if they've already turned.
Never forget that some of the biggest, fastest, and most powerful profits come under conditions exactly like those we're facing right now.
Use This Information to Your Advantage
Millions of investors will look at the chart I've just laid out for you and completely miss the point. They'll be so focused on the possibility of a looming downside that they'll forget the upside.
If that doesn't make sense, think about it this way.
Chances are you wouldn't go to your favorite store when they're having a 50% more sale any more than I would. But I'm willing to bet you'd beat feet to the door if they held a 50% off sale.
That's how you need to think about market reversals.
Contrary to what most investors believe, they're not something to be feared but, rather, an incredible opportunity.
That was the case in 2008 when Raytheon Co. (NYSE: RTN) traded at a 24% discount relative to its three-month high the last time the 21-month moving average was breached. It's come roaring back to the tune of 217% since while also growing its dividend by 139% over the same time frame.
Right now, Walt Disney Co. (NYSE: DIS) is trading under very similar circumstances.
That excites me because I know what happened the last time around - the company dropped to a 45% discount from $30 a share before reversing and going on a 425% run through August 2015, when it peaked at $122.08 a share.
So far the company has sold off 19.74% from 52-week highs but, in contrast to most stocks, still has a very bright future:
The company just adopted demand-based pricing at its theme parks, which means you'll pay only $95 a head during less popular times but $115 a head during the crowded high-demand months.
It's just warming up to the "Star Wars" franchise that's going to be worth billions in the years ahead.
And, it's going to open a park in Shanghai, China, that puts it within striking distance of 500 million Chinese Disney devotees.
We've obviously just scratched the surface here when it comes to technical analysis. However, there's lots more where that came from, and I can't wait to cover it together in the months ahead.
Chaos (and bearish crosses) always create opportunity!
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