Sunday, March 22, 2015

Another sign stocks are about to start another run higher: NYSE index trying to breakout

Previously, we discussed how the NYSE index has been forming a continuation H&S bottom, which, if completed, would push stocks higher to continue the current 6-year stock bull market. Here is the NYSE chart as of last Friday:

We see that the July 2014 high has rejected three attempts to break higher. Now stocks are making a fourth attempt to overcome the July 2014 high.

Do I think the NYSE index will break higher and complete the continuation H&S bottom? It is doesn't matter what I think. And I always try to remember that my main goal as a trader is to participate with the market trend rather than try to anticipate or predict the future. This mentality helps me accept the actual price action rather than get lost in my wishes and hopes.

But if were to offer my opinion (run away everyone), I would say that I am looking for stocks to go higher and the NYSE index complete this big continuation H&S bottom pattern. Why? My main reason is that small-capitalization stocks as measured by the Russell 2000 index (symbol: IWM) has in the last couple of weeks broken out of a 16-month consolidation rectangle pattern as seen here:

Of course things can change quickly. But epic bull markets, like the current one, don't die easily. Still, traders must be mentally flexible. We have to avoid following conventional wisdom and ask uncomfortable questions. So we must ask whether there is a case for potential stock weakness based on classical charting principles. The following is one chart interpretation that urges caution:

SPY, the ETF that tracks the S&P 500 index, is potentially forming a bearish ascending wedge. Remember that traders have different interpretations of the same chart. Some traders will disagree and see no ascending wedge. Personally, I think it is possible and reasonable for a trader to conclude that SPY's price action may be forming a bearish ascending wedge. Charting is about possibilities, and traders should challenge themselves to always try to see the other side of the argument.

As always, it will be interesting to see how the NYSE and SPY charts play out in the coming weeks.

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