Getting Our Bearings
Regardless of whatever Fiscal Cliff mumbo jumbo the media derives from US government's debates, and regardless of the outcome, the only thing that will matter is gauging the trend. As they say in the investment world, "The trend is your friend"
If you trade on margin, this is especially true.
The next couple of days are important. If the Transportation average bounces down from 5200, we can expect more of the same behavior from the Dow, unless something fundamentally changes in the market's perception of the economy and the outlook for the next 12 months.
That means if the transports can't break this resistance, any significant rally in the Dow should be viewed as a profit taking opportunity. This is especially true for small cap stocks. A key thing here is to know what you have invested in! Not every stock will follow the primary trend of the markets, and not all ETFs and mutual funds are made equal.
If the transports break through resistance, then we're looking at a slightly different scenario where we need to watch the next levels of resistance for the Dow and Transportation Averages. In either case, I would still view rallies as profit taking opportunities even in this scenario. I am not looking for the exits, except to re-balance the portfolio.
If you are a short term trader, these ideas don't quite work the same, as you need to recognize intra-day cycles and trends. Thus, careful and dilligent chart analysis is best suited for day traders. See Scott Pluschau's blog for detailed chart analysis, and access to premium content: www.scottpluscau.blogspot.com
Dow's theory is well suited for long-term index investors (with a 5 year time horizon or more), and especially for those wishing to find some simplicity in investing, and security in broad market timing.
Timing the Market ... Ya, but?
I know many, many people who say that "timing the market is a fool's errand". But ultimately, timing is also extremely important when it comes to investing. Think about it this way: acting with confidence based on the facts of the reality of the market is everything. If you buy the right security at the wrong time, and thus base your decision on either a past reality of what it was, or a future reality of what it may or may not be; or because you think that 'x' politician is going to bring about hyperinflation, or because the 'y' factors of Europe or the US are going to collapse the economy, you've bought the wrong security! Buying any security must take into account the real, tangible actual trend. Thus some measure of timing must be employed in the purchase of all stocks, bonds and other securities. In long-term investing, that simply means you want to buy companies in the right sector, and at the right time in that sector's cycle ... that is, before the major moves of a primary up-trend.
The key is to avoid the trap of thinking that we can beat the market, or bet against it. The reality is that most of us cannot beat the market for simple lack of time, energy and resources (not for lack of information!). So a much better approach is to use the market to profit based on what we know about its nature. Then, beating the market is redundant, because we are essentially teaming up with the market. We will make investment decisions based on reality, rather than on our own perceptions or emotions or intuitions or feelings (unless, those things are firmly rooted in reality).
Stay Sharp
R
