How to Know When the Stock Market Has Finally Peaked

How to Know When the Stock Market Has Finally Peaked
By Jeff Clark
November 13, 2009

"We're doomed."

That was the opening line of my speech at the S&A Alliance Conference last Monday.

While the comment may seem downright pessimistic, I was actually one of the most optimistic presenters at the conference. That probably says all you need to know.

At dinner the night before the conference, I was lucky enough to sit down with several of the smartest investing minds I know. Each one of them was cautious, if not downright gloomy on the prospects of the U.S. economy and the stock market. And with good reason...

Stocks are trading at ridiculously high multiples. What little growth there is in the economy is purely the result of the U.S. government spending your future tax dollars today. There's a genuine worldwide concern over the potential collapse of the U.S. dollar. And let's not forget about the 10.2% "official" unemployment rate.

No wonder the conference was shrouded with gloom and doom.

The stock market responded by rallying 250 points that day. It was a proverbial flip of the finger to all of the bears in the room and a reminder of the old saying, "The stock market can remain irrational longer than you can remain liquid."

Pinpointing the exact top in the stock market is an exercise best left to crystal-ball gazers and tea-leaf readers. There is a way, however, for technical analysts to identify a topping process. It's not as good as nailing the exact date the stock market puts in its peak, but it'll get you out close enough to the top and prevent you from giving back all those hard-earned gains.

It's called a fan chart, and it looks like this...

A fan chart is formed by drawing multiple support and resistance lines from the most recent correction low.

The correction we experienced in July gives us a good starting point. Since then, the market has made a series of higher highs and higher lows. This is typically a bullish pattern. However, the distance between each new high point is getting smaller. And the distance between each "higher low" is smaller as well.

This action creates a "rounding" type of chart pattern – which is typically associated with a topping process.

In the chart above, every time the market broke below one of the fan lines, it formed a higher low and then bounced back up to test the line. The angle of the lines still allowed each bounce to generate a higher high.

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That won't be the case if the market breaks below the most recent fan line. If the S&P 500 drops below support at about 1,050, any bounce back up toward the line will create a lower high, and it'll signal the start of a new downtrend for the market.

On the other hand, if the market can bust out above resistance (currently at about 1,110 and rising every day), then forget about the market topping. Stocks will be off to the races through the end of the year.

A break below 1,050, however, may make all those gloomy forecasts at the Alliance Conference come true.

Best regards and good trading,

Jeff Clark

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•	Oil slides away from $80... crude slumps 3% yesterday on unexpected supply increase.
•	Online retail giant Amazon vaults to fresh highs... up 25% in a single month.
•	Tech stock fund XLK hits a new high... up 26% in four months.
•	Earnings today... Abercrombie & Fitch, Agilent Technologies, JCPenney.

	Last	Change	52-Wk
S&P 500	1097.91	+0.94%	+16.73%
Oil (USO)	40.76	+0.77%	-31.35%
Gold (GLD)	104.23	+1.02%	+35.00%
Silver (SLV)	14.44	+1.51%	+88.95%
U.S. Dollar	75.28	-0.01%	-9.39%
Euro	1.50	+0.11%	+12.20%
VIX	21.49	+0.28%	-69.44%
HUI	448.69	+0.60%	+120.38%
10-Year Yield	3.40%	-0.02	-0.47

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Company	Sym	Industry
Microsoft	MSFT	software
Telefonica	TEF	telecom
Coca-Cola	KO	soft drinks
GlaxoSmithKline	GSK	Big Pharma
Brit Am Tobacco	BTI	cigarettes
United Tech	UTX	conglomerate
Amazon	AMZN	online shopping
Medtronic	MDT	medical devices
Texas Instruments	TXN	semiconductors
Dow Chemical	DOW	chemicals
Wipro	WIT	outsourcing
Infosys	INFY	outsourcing
General Mills	GIS	packaged foods
ADP	ADP	payroll
Stryker	SYK	medical supplies
CSX	CSX	railroads
BT Group	BT	telecom
McKesson	MCK	medical supplies
Starbucks	SBUX	coffee
Telmex	TII	telecom
Cognizant	CTSH	outsourcing
TD Ameritrade	AMTD	broker
Paychex	PAYX	payroll
Vivo Parti	VIV	telecom
Crown Castle	CCI	telecom
Intuitive Surgical	ISRG	medical devices
Life Tech	LIFE	biotech
Yanzhou Coal	YZC	coal mining
Smith & Nephew	SNN	medical devices
Seagate	STX	data storage
Delhaize	DEG	grocery stores
W.W. Grainger	GWW	industrial equip
Goodrich	GR	defense
DTE Energy	DTE	utilities
Ternium	TX	steel
Varian Medical	VAR	medical devices
CareFusion	CFN	medical supplies
Virgin Media	VMED	TV programs
McCormick	MKC	packaged foods
MeadWestvaco	MWV	packaging
Eastman Chem	EMN	chemicals
Ctrip	CTRP	online travel
Avnet	AVT	electronics
Avery Dennison	AVY	paper products
IMS Health	RX	medical research
Hewitt Assoc	HEW	outsourcing
Perrigo	PRGO	drug products
AMD	AMD	semiconductors
Transatlantic	TRH	insurance
Total System	TSS	payments
Verisk Analytics	VRSK	risk mgmt
CMS Energy	CMS	utilities
Nalco	NLC	synthetics

Company	Sym	Industry
AGA Medical	AGAM	medical devices
Western Refining	WNR	refining
Vitacost	VITC	mail order
First Busey	BUSE	bank
CardioNet	BEAT	medical devices
Smithtown	SMTB	bank
Cheniere Energy	LNG	oil & gas drilling
Citizens & Northern	CZNC	bank
Farmers Capital	FFKT	bank
Metro Bancorp	METR	bank
Lightbridge	LTBR	synthetics
Invitel	IHO	telecom

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