How a Canary Can Protect Your Portfolio
By Jeff Clark
December 14, 2006
If the bird dies, you have to get out of the shaft. That’s what they tell everyone.
Though low-tech, one of coal mining’s earliest warning systems for the presence of methane gas – the canary – was extremely effective and rather easy to read.
When it comes to warning of a stock-market correction, the shares of Merrill Lynch (MER) play the role of the canary. And, right now, the canary is coughing.
I’ve written about this before, and I know I run the risk of being labeled a “perma-bear.” But the action in MER is so amazingly similar to what happened just before the S&P 500 dropped 8% in May, I owe it to you to repeat myself.
Take a look at this chart...
Back in April, MER broke to the downside of a “bearish rising-wedge” pattern. It then rallied back up to retest the breakdown level – and dropped 18% as the market gave back all the gains on the year.
Today, we have a similar situation. Two weeks ago, MER broke to the downside of a “bearish rising-wedge” pattern. It has since rallied back up to retest the breakdown level.
Guess what comes next?
Now, I know all about the Santa Claus rally. I know that the final two weeks of the year are strongly biased in favor of the bulls. I know that institutional money managers will try to goose the market higher in order to secure larger bonuses for themselves.
But the canary doesn’t know that.
All the canary knows is that there’s something in the air. And it’s just about time to get out of the shaft.
Best regards and good trading,
Jeff Clark
