Market Rally Looks Poised to Continue
When we trade along the primary trend of the market, the chances of success increase. At times finding that trend and riding the wave is easy and other times it is a flirtation with frustration. The past three months have been extremely frustrating.
Using the Dow Jones Industrial Average (Dow) as a proxy for the broad market, we see a sharp decline (red line) into the March lows that was followed by an equally dramatic rally (black line). This led to a consolidation pattern that has kept the Dow in a tight trading range with 8,200 as the floor and 8,600 as the ceiling (black dotted lines).
Click to EnlargeDuring this consolidation, we have seen many false signals. At times prices moved higher. Other times the fell below the trading range. Within this movement, a head-and-shoulders pattern (blue arrows) indicated that markets were set to move lower with 7,600 as a downside target. Over the last five trading days, this has changed.
Last week the Dow rocketed above an interim downtrend (green line), its 50- and 200-day moving averages (MA), and the top end of the trading range. Now prices have moved above the June peak and seem destined to continue higher.
With other worldwide markets confirming this strength, we should expect prices to continue higher. Bullish momentum confirmed by multiple data points establishes the groundwork for a sustained rally.
Blain here. Last week was the start of earnings season, and what many investors were believing to be ugly has thus far been very positive. The banks are leading the way by blowing out their earnings and fueling more market optimism. This effectively reversed the technical head & shoulders breakdown of the Dow Jones mentioned above.
With interest rates effectively 0% it is no wonder why banks are pulling strong numbers; their profit margins are artificially inflated. Furthermore, many companies low-balled their earnings forecasts after getting decimated in late 2008 and early 2009. When times are tough companies set their bars extra low so that the short term results of the next quarter look fantastic.
Investors should now expect earnings season to continue to be strong and fuel more buying heading into August. Taking a peak at the chart below reveals we are not far off 2009 market highs.
Click to EnlargeSean Hannon, CFA, CFP is a professional fund manager. He runs EPIC Insights Weekly, the free Sunday newsletter, and also is the founder of EPIC Advisors, LLC. View Sean’s Full Bio.
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