A Bold Prediction

On Monday, when it was apparent that we were in for a big day as futures went limit up in pre-market, I said I wanted to see a candlestick pattern called “three white soldiers.”  


Three white soldiers basically means three pretty good sized up days in a row. This pattern is considered very bullish, especially after a period of consolidation. And the reason it’s bullish is fairly easy to deduce. 


A period of consolidation for a stock means that not much is changing. The buyers and sellers are pretty much in agreement as to what it’s worth. And so the price doesn’t change much. 


When the stock price suddenly makes a strong, three-day advance, it means something significant has changed.   


(I want to mention here that I’m not really a technical analyst, but I do enjoy the Japanese art of candlestick reading because it uses simple price action to describe investor sentiment. I would recommend a little familiarity with candlestick patterns.)  


Anyway, I was hoping that investors would respond strongly to the EU’s trillion dollar action. And like I said, if the market is going to shake off the negative sentiment and get back to rally-mode, it needs to do so quickly. And it needs to take out some resistance points, too.   


Why? Well, because it was pretty clear that Monday was a short-covering rally. The bears were emboldened after the declines of last week. And actions of the EU pretty much mowed them over for one day.   


But without a statement that something significant had changed, investors would have no incentive to hold their positions, and the bears would become more aggressive sellers once again.   


So we didn’t get the three white soldiers. And I’ll admit I was a bit concerned that the selling would resume when the S&P 500 traded briefly above resistance at 1,165 intra-day, but then closed below that level. 


However, yesterday’s close firmly above 1,165 on the S&P 500 looks pretty good. I don’t know the candlestick name for the pattern traced out over the last couple of days. But like I said yesterday, I get the feeling investors are eager to put the Greek drama behind them.   


The next resistance level to watch on the S&P 500 is 1,188. And we will also want to see 1,165 hold.   


Cisco’s (Nasdaq:CSCO) John Chambers is one of my favorite CEOs. The man is a straight shooter. He manages expectations well and always seems to keep his company in position to beat expectations.   


Last night, Cisco reported its Q3 earnings. The company beat by $0.03. Revenues also beat expectations. Cisco raised current quarter revenues by a few hundred million, and said the recovery in tech spending should last through the third quarter.  


And then Chambers said, "Given all the uncertainties regarding the strength and shape of the recovery, concerns about the recovery possibly slowing and the unknown extent of job creation, we encourage you to wait for additional economic data before becoming too optimistic…" 


And the stock was off $1 or so afterwards in after-hours trading. That’s brilliant.   


Cisco trades with a tailing P/E of 25 and a forward P/E of 15. With revenues and earnings still growing, the stock should have some upside. Because we know that even though Chambers raised expectations, he’ll still manage to position Cisco to beat them. And all the while telling investors not to get carried away.   


IBM (NYSE:IBM) made an incredibly bold forecast yesterday. The company said it will earn $20 a share…in 2015! How’s that for a counterpoint to Chambers’ warning about irrational exuberance?  


IBM is slated to make $11.27 a share this year. So that’s some pretty good growth.   


Not that I’m surprised. I’ve had IBM in the Top Stock Insights portfolio since August of 2009. Looks like I’ll have to keep it until 2015. But with a forward P/E of 10, I guess I don’t mind holding it.  


I’m a little surprised that we haven’t seen any strength from the euro yet this week. But checking the U.S. Dollar Index chart, it would seem that a move lower for the dollar, and a consequent move higher for the euro, is coming…   


Honestly, it’s a bit surprising that stocks have recovered as well as they have in light of the persistent dollar strength. We could throw gold in there, too.  


The U.S. Dollar’s action is certainly not forecasting inflation. And yet gold has hit all time highs while the dollar has hit a 52-week high. It’s always important to remember that causal relationships in the financial markets are always “subject to change.” A falling dollar will be a catalyst for gold prices, until it isn’t. A strong dollar will hurt stock prices, until it doesn’t.   


We can trade according to the “rules”, but never forget the rule that states “all rules are subject to change without notice.”   


And besides, I don’t mind if the catalysts are parsed out on an “as needed basis.” We’ve gotten a liquidity boost from the EU. And stocks have taken out an important resistance level. Next up, gold sells off a bit, suggesting that investors are not clamoring for a “safe-haven”. Then, we get a sell-off in U.S. dollars and a rise for oil prices. Perfect!  


I just recommended a stock to Energy World Profits that’s moving from a $0.03 loss in 2009 to a $0.14 a share profit in 2010 and $0.38 a share in 2011 – all because of its Bakken oil pool operations.   


The stock is moving higher, despite weaker oil prices. That’s a pretty clear indication that this company will grow earnings dramatically, regardless of temporary swings in oil prices. And when oil prices do move higher, this stock will get an even bigger boost   


You can learn more about this $4 Bakken producer and Energy World Profits HERE. You won’t be disappointed. 

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