We’ve been able to logically navigate the swings in the market thus far using some technical tools, some logic and as always, a bit of luck.  Much of what has moved markets has been unpredictably external to market dynamics and we are still under some uncertainty in that regard.  The activity in the markets reflects what is known or expected.  Here is my favorite chart that I keep as a reminder of the constant uncertainties in navigating the markets over 40 years.

Any further clarity on the over reaction to the health scare should put the markets back on firm foundations.  Predicting the future is not in the toolset, but prepared responses are.

We’ve been able to identify peak fear momentum and possible areas of climax selling.  We’ve identified stocks such as INTC  and AAL that displayed the classic characteristics of bottoming and some significant rebounds have happened.  We’ve mapped out areas of possible price targets based on historical relationships and this allows planned actions rather than just reactive ones.

With today’s activity in the Dow Jones, the index has reached the projected 50% retracement level at the 23,800 level as outlined in previous posts.

While this does not mean that the rally will end here, it only means that we can expect a pause while profit takers from lower prices reduce their positions.  As noted this area is one of supply as well since this is near where prices first broke away to the downside.  The 62% level still looms ahead and will be the next important threshold to cross.

As we know, many strong relative strength stocks have reached this retracement level and some have pushed beyond.  Stocks we have identified such as JNJ, MSFT, MCD and INTC appear to have overcome their bearish swings and may in fact be resuming their long uptrends.  Other more severely sold off stocks appear to have seen their worst and will also make their moves back up over time.

Since the main indices have reached a logical area of resistance, tactically it makes sense to be less aggressive here or to lock in gains.  We can plan for areas of re-entry using retracement tools discussed earlier.  We concentrate on the strong relative strength issues, but also can become more aggressive on the longer term recovery areas such as airlines, oil companies and financials.

We will filter industry groups using relative strength analysis to identify the highest probability sectors as the rally progresses and that will be the subject of the next commentary.  Having a plan in place removes a lot of emotional turmoil from decision making when it comes time to act.