From the Top

March Option Advisor Commentary

Discussing the significance of 'double lows,' and how to trade them

by 3/5/2012 11:28 AM
Stocks quoted in this article:

The following is a reprint of the market commentary from the March edition of the Option Advisor, published on Feb. 23. Prices and the chart are as of the close on Feb. 23. For more information or to subscribe to the Option Advisor, click here.

Last month in this space, I discussed the significance of long-term moving averages, in particular the 40-month and the 320-month moving averages of the S&P 500 Index (SPX). And I drew bullish conclusions for the market, based in no small part on the action of the S&P relative to these long-term moving averages. I cited as support for the use of such moving averages an excerpt from my article, entitled "Trading on the Level," in the summer 2011 issue of our SENTIMENT magazine.

This month, I'm going to discuss the importance of levels that represent double a previous major low. As I stated in that same SENTIMENT article:

"Over the years, I've found that when a stock or a stock index doubles from a major low, the share price level associated with the double often becomes a 'speed bump' or a resistance area. This is likely because many holders of the security decide it is time to take some or all of their investment off the table because it has already doubled, which raises concerns that it could be vulnerable to a reversal of fortune. This phenomenon also plays to the natural (and self-defeating) tendency for investors to be more fearful of giving up profits on successful trades than of incurring additional losses on unsuccessful trades... A similar phenomenon can operate on 50% declines off a major peak."

An excellent example of the "double as speed bump" principle was the action of the S&P in 2011 around the 1,333 level, roughly double the intraday low of 666.79 at the March 6, 2009 market bottom. As the accompanying chart well illustrates, the S&P struggled mightily and frequently in 2011 at the 1,333 doubling level. Since first reaching 1,333 in mid-February 2011, the S&P crossed above and below this level on eight separate occasions, and closed within a point of 1,333 six times. But the final move by the S&P back below 1,333 in 2011 had an extremely ugly aftermath. The close at 1,331.96 on July 26, 2011 was followed by a 17% decline over the next two weeks, and set the stage for the choppy, volatile, and generally unpleasant market action over the next three months.

But something different has occurred this year, and it is a non-trivial aspect of the more bullish technical foundation that is being constructed for the market in 2012. After being stopped cold at a peak of 1,333.47 on January 26, the S&P proceeded to regroup and close at 1,344.90 on February 3. And over the subsequent 13 trading days, the S&P has traded no lower than 1,335.92, with today's close at 1,363.46 representing a new 2012 closing high.

 Daily Chart of SPX since September 2008

Of course, an S&P close just 30 points (or less than 3%) above its erstwhile troublesome 1,333 doubling point is not enough of an "all clear" signal to definitively prove we will not soon have to deal with that level again. But the S&P's price action this year relative to 1,333 is another very encouraging sign, as is its price action around key long-term moving averages, and a sentiment backdrop that remains overly pessimistic.

Listed below are the doubling points for three stocks that have played out mostly as speed bumps so far this year. These may be worthy of your attention -- either as resistance levels to fade, or potential upside breakout fodder.

 Stocks with Doubling Points to Watch

Finally, the price action of Apple (AAPL) has been an excellent model for how multiples beyond two can play out for a stock in a very strong uptrend. AAPL doubled very quickly from its 2008-2009 lows and moved on to triple these lows by April 2010. It then languished for about four months near this tripling point, before launching a new rally that propelled the stock to quadruple these lows by year-end 2010. This was followed by sideways action for the first half of 2011, until yet another push higher achieved the quintupling point from the 2008-2009 lows in July 2011 (near the $400 level). And -- once again -- there were six months of sideways activity until the mammoth 2012 rally began in earnest in mid-January.

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