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Will this year be a "sell in May and go away?" Or will this time be different? As the number of stock market skeptics seemingly increases weekly, I'd like to take the role of devil's advocate for a moment. Even though market fundamentals admittedly continue to suggest headwinds for the market, bullish chart patterns remain in place and suggest that at least for the moment, any bearish panic is premature.
The first chart I will present is that of the S&P 500 Index. The white horizontal line is the previous all-time high in the index. You can see that the index is currently trading above that level. The rising parallel red lines denote the major bullish trend channel that's been in place since the beginning of the cyclical market rebound which began in March of 2009. The rising parallel yellow lines represent the minor bullish trend channel of lesser degree; and finally, the rising parallel blue lines showcase the minor-minor bullish trend channel. Note how the most recent market decline held support at the minor-minor channel's support line.
The next chart is a weekly bar chart of the Dow Jones Transportations Average Index. A potential massive inverted head-and-shoulders pattern is in place, with the shoulders and head showcased by horizontal red lines. The neckline formed is the index's previous all-time high, which is shown as the horizontal white line. This area was symmetrically tested as resistance three times before relenting in mid-January of this year. The upward sloping parallel blue lines represent yet another well-defined bullish trend channel for an index. Finally, notice how the market's recent retreat was not even enough to retest the neckline of the inverted head-and-shoulders pattern, which is normally a common occurrence.
The third and final chart is a weekly bar chart of the Russell 2000 Index. The rising red parallel lines show yet another well-defined bullish trend channel. The white horizontal line represents the previous all-time high for the index. As you can see, the index is trading above this level and pressing for new highs.
I certainly cannot guarantee that stocks will continue to rise. But I can read a chart. These charts suggest to me that any bearish prognostications are truly predictions for the future; but that current trends are bullish. That may soon change, but for me I will let charts identify that time. I have previously become prematurely bearish because of eroding fundamentals which were accompanied by technical chart and market divergences, only to see each and every divergent indicator ground up like chuck meat.
Finally, because of the unprecedented nature of this crisis and because of the unprecedented policy responses by global central banks, I think it's currently extremely difficult to gauge cyclical market direction based upon market fundamentals. On the other hand, the secular outlook seems easier to decipher, but the unprecedented nature already described invalidates anyone's assertions about timing those secular changes.
Chief Investment Strategist
Preferred Planning Concepts, LLC
2800 South River Road #240
Des Plaines, IL 60018
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.
© 2013, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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